management FOURTH EDITION
Chuck Williams Texas Christian University
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To my parents, Robert and Mary Williams, Thank you for your love, encouragement, and support, and for demonstrating the value of education, hard work, and persistence.
To Jenny, Ben, Rebecca, and Zack, The book is done. Let’s play.
To my college professors, For expecting the best, challenging me to articulate my views, and patiently teaching me (over and over again) how to write.
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brief contents Part 1: Introduction to Management 1 1. 2. 3. 4.
Management 2 History of Management 32 Organizational Environments and Cultures 68 Ethics and Social Responsibility 98
Part 2: Planning 131 5. 6. 7. 8.
Planning and Decision Making 132 Organizational Strategy 166 Innovation and Change 202 Global Management 236
Part 3: Organizing 269 9. Designing Adaptive Organizations 270 10. Managing Teams 304 11. Managing Human Resource Systems 336 12. Managing Individuals and a Diverse Work Force 384
Part 4: Leading 413 13. Motivation 414 14. Leadership 448 15. Managing Communication 484
Part 5: Controlling 521 16. Control 522 17. Managing Information 552 18. Managing Service and Manufacturing Operations 580 Self-Assessment Appendix 613 Endnotes 627 Glossary 661 Name Index 679 Subject Index 687 BRIEF CONTENTS
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contents Part 1: Introduction to Management
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Chapter 1: Management
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What Is Management? Management is… 4 • Management Functions, 5 What Really Works Meta-Analysis What Do Managers Do? Kinds of Managers, 10 Doing the Right Thing Tell and Show People That Ethics Matter Managerial Roles, 14 What Does It Take to Be a Manager? What Companies Look For in Managers, 18 • Mistakes Managers Make, 20 • The Transition to Management: The First Year, 21 Why Management Matters Competitive Advantage through People, 24 Key Terms Concept Check Self Assessment Management Decision Management Team Decision Develop Your Career Take Two Video
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26 26 27 27 28 29 30
Chapter 2: History of Management
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In the Beginning The Origins of Management, 34 The Evolution of Management Scientific Management, 38 • Bureaucratic and Administrative Management, 44 • Human Relations Management, 49 Doing the Right Thing A Dangerous Mix: Power, Authority, and Autonomy Operations, Information, Systems, and Contingency Management, 56 Key Terms Concept Check Self-Assessment Management Decision Team Management Decision Develop Your Career Potential Take Two Video
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7 9 11 18
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55 63 63 64 64 65 66 67 TABLE OF CONTENTS
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Chapter 3: Organizational Environments and Cultures 68 External Environments Changing Environments, 70 • General Environment, 74 • Specific Environment, 79 Doing the Right Thing Dealing with Gifts and Suppliers Making Sense of Changing Environments, 85 Internal Environments Organizational Cultures: Creation, Success, and Change, 88 Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
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83 88
94 94 94 95 95 96 97
Chapter 4: Ethics and Social Responsibility 98
Ethics and the Nature of Management Jobs, 101 • Workplace Deviance, 102 • U.S. Sentencing Commission Guidelines for Organizations, 104 How Do You Make Ethical Decisions? Influences on Ethical Decision Making, 108 • Practical Steps to Ethical Decision Making, 112 Doing the Right Thing If You Cheat in College, Will You Cheat in the Workplace? What Really Works Integrity Tests What Is Social Responsibility? To Whom Are Organizations Socially Responsible?, 118 • For What Are Organizations Socially Responsible?, 121 • Responses to Demands for Social Responsibility, 123 • Social Responsibility and Economic Performance, 124 Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
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112 113 117
126 127 127 127 128 129 130
What Is Ethical and Unethical Workplace Behavior? 100
Part 2: Planning Chapter 5: Planning and Decision Making 132 Planning 134 Benefits and Pitfalls of Planning, 134 • How to Make a Plan that Works, 137 Doing the Right Thing Stretch Goals: How to Avoid the “15 Percent Delusion” 138 Planning from Top to Bottom, 142 What Really Works Managing by Objectives 144 What is Rational Decision Making? 146 Steps and Limits to Rational Decision Making, 147 Doing the Right Thing PLUS—A Process for Ethical Decision Making 151 Using Groups to Improve Decision Making, 153 What Really Works Devil’s Advocacy, Dialectical Inquiry, and Considering Negative Consequences 157 Key Terms 161 Concept Check 161 Self-Assessment 161
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131 Management Decision Management Team Decision Develop Your Career Potential Take Two Video
162 163 164 165
Chapter 6: Organizational Strategy 166 Basics of Organizational Strategy Sustainable Competitive Advantage, 168 • Strategy-Making Process, 172 Doing the Right Thing Is Ethics an Overlooked Source of Competitive Advantage? What Really Works Strategy Making for Firms, Big and Small Corporate-, Industry-, and Firm-Level Strategies Corporate-Level Strategies, 180 • Industry-Level Strategies, 186 • Firm-Level Strategies, 191 Key Terms Concept Check Self-Assessment
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173 174 180
197 197 197
Management Decision Management Team Decision Develop Your Career Potential Take Two Video
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Chapter 7: Innovation and Change 202 Organizational Innovation Why Innovation Matters, 204 • Managing Innovation, 211 Doing the Right Thing Give Credit, Don’t Take It Organizational Change Organizational Decline: The Risk of Not Changing, 219 • Managing Change, 220 What Really Works Change the Work Setting or Change the People? Do Both! Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
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213 218
230 231 231 231 232 232 233 234
Chapter 8: Global Management 236 What Is Global Business? Global Business, Trade Rules, and Trade Agreements, 238 How to Go Global? Consistency or Adaptation?, 246 • Forms for Global Business, 247 Where to Go Global? Finding the Best Climate, 252 Doing the Right Thing Foreign Corrupt Business Practices Act Becoming Aware of Cultural Differences, 257 • Preparing for an International Assignment, 259 What Really Works Cross-Cultural Training Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
Part 3: Organizing Chapter 9: Designing Adaptive Organizations 270 Designing Organizational Structures 274 Departmentalization, 274 • Organizational Authority, 280 • Job Design, 284 Designing Organizational Processes 288 What Really Works The Job Characteristics Model: Making Jobs More Interesting and Motivating 289 Intraorganizational Processes, 290 Doing the Right Thing Don’t Scavenge That Office If Somebody Is Still in It 296 Interorganizational Processes, 297 Key Terms 299 Concept Check 300 Self-Assessment 300 Management Decision 300 Management Team Decision 301 Develop Your Career Potential 302 Take Two Video 303
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262 263 264 264 264 266 266 268
269 Chapter 10: Managing Teams Why Work Teams? The Good and Bad of Using Teams, 306 Doing the Right Thing Don’t Be a Team Slacker— Do Your Share Kinds of Teams, 312 Managing Work Teams Work Team Characteristics, 318 What Really Works Cohesion and Team Performance Enhancing Work Team Effectiveness, 324 Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
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309 317
319 331 331 332 332 333 334 335
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Chapter 11: Managing Human Resource Systems 336 Determining Human Resource Needs Human Resource Planning, 339 • Employment Legislation, 342 Finding Qualified Workers Recruiting, 347 • Selection, 351 Doing the Right Thing Don’t Embellish Your Résumé Doing the Right Thing Don’t Use Psychics, Lie Detectors, or Handwriting Analysis to Make HR Decisions What Really Works Using Selection Tests to Hire Good Workers Developing Qualified Workers Training, 360 • Performance Appraisal, 364 Keeping Qualified Workers Compensation, 369 • Employee Separations, 372 Key Terms Concept Check Self-Assessment Management Decision Management Team Decision
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Chapter 12: Managing Individuals and a Diverse Work Force 384
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Diversity and Why It Matters Diversity: Differences that Matter, 385 Diversity and Individual Differences Surface-Level Diversity, 389 • Deep-Level Diversity, 396 What Really Works Conscientiousness: The Organized, Hardworking, Responsible Personality How Can Diversity Be Managed? Managing Diversity, 402 Doing the Right Thing Don’t Break the Law in the Name of Diversity Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two
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355 358 360 368
376 377 377 377 378
Part 4: Leading
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406 408 408 408 409 409 410 411
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Chapter 13: Motivation 414 What Is Motivation? Basics of Motivation, 416 Doing the Right Thing Faking It, Not Making It How Perceptions and Expectations Affect Motivation Equity Theory, 424 Expectancy Theory, 429 How Rewards and Goals Affect Motivation Reinforcement Theory, 433 What Really Works Financial, Nonfinancial, and Social Rewards Goal Setting Theory, 439 • Motivating with the Integrated Model, 442 Key Terms
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416 418 423
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Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
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Chapter 14: Leadership 448 What Is Leadership? Leadership, 450 Doing the Right Thing The Three M’s: Mission, Mentor, and Mirror Who Leaders Are and What Leaders Do, 454 What Really Works Leadership Traits Do Make a Difference
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Situational Approaches to Leadership Putting Leaders in the Right Situation: Fiedler’s Contingency Theory, 460 • Adapting Leader Behavior: Path-Goal Theory, 463 • Adapting Leader Behavior: Hersey and Blanchard’s Situational Leadership® Theory, 467 • Adapting Leader Behavior: Normative Decision Theory, 469 Strategic Leadership Visionary Leadership, 474 Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
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472 479 479 480 480 481 482 483
Chapter 15: Managing Communication 484 What Is Communication? 486 Perception and Communication Problems, 486 • Kinds of Communication, 491 Doing the Right Thing Protect Personal, Confidential Information 499 How to Improve Communication 500 Managing One-on-One Communication, 500 • Managing Organization-Wide Communication, 510 Key Terms 515 Concept Check 515 Self-Assessment 515 Management Decision 516 Management Team Decision 517 Develop Your Career Potential 518 Take Two Video 519
Part 5: Controlling
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Chapter 16: Control 522 Basics of Control The Control Process, 524 How and What to Control Control Methods, 530 Doing the Right Thing Don’t Cheat on Travel Expense Reports What to Control, 534 Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
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531 547 547 548 548 549 550 551
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Chapter 18: Managing Service and Manufacturing Operations 580
Chapter 17: Managing Information 552 Why Information Matters Strategic Importance of Information, 555 • Characteristics and Costs of Useful Information, 557
Doing the Right Thing Recycling and Disposing of Computer Equipment Getting and Sharing Information Capturing, Processing, and Protecting Information, 561 Doing the Right Thing Password Dos and Don’ts Accessing and Sharing Information and Knowledge, 569 Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
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Managing for Productivity and Quality Productivity, 582 • Quality, 586 Managing Operations Service Operations, 593
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Doing the Right Thing Protect Your Front-Line Staff: The Customer Isn’t Always Right Manufacturing Operations, 596 • Inventory, 600 Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
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565 607 607 608 608 609 609 611
Self-Assessment Appendix Endnotes Glossary Name Index Subject Index
613 627 661 679 687
What’s New in 4e?
PREFACE
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A B O U T
T H I S
E D I T I O N
If you walk down the aisle of the business section in your local bookstore (or surf the “Business” page at Amazon.com), you’ll find hundreds of books that explain precisely what companies need to do to be successful. Unfortunately, these books tend to be faddish, changing every few years. Lately, the best-selling business books have emphasized technology, leadership, and dealing with change, whereas ten years ago the hot topics were reengineering, going global, mergers, and management buyouts. One thing that hasn’t changed, though, and never will, is the importance of good management. Management is getting work done through others. Organizations can’t succeed for long without it. Well-managed companies are competitive because their work forces are smarter, better trained, more motivated, and more committed. Furthermore, good management leads to satisfied employees who, in turn, provide better service to customers. Because employees tend to treat customers the same way that their managers treat them, good management can improve customer satisfaction. Finally, companies that practice good management consistently have greater revenues and profits than companies that don’t. My goal in writing the first edition of Management, was to write a textbook that students would enjoy, that students would refer to for practical, theory-driven advice, and that encouraged students to put theory-driven knowledge into practice for themselves. For the fourth edition, my goal was to update the content to reflect the changing face of management and to keep the text relevant, fresh, and interesting for students. In short, the ideas and concepts you’ll learn about in this book can improve the performance of the organization and department where you work, help you solve job-related problems, and improve your own job performance, even if you’re not a manager. So welcome to Management, 4e! Please take a few minutes to read the preface and familiarize yourself with the approach (combining theory with specific stories and examples), features, pedagogy, and end-of-chapter assignments in Management. This is time well spent. After all, besides your instructor, this book will be your primary learning tool.
Combining Theory with Specific, Up-to-Date Stories and Examples Say “theory” to college students and they assume that you’re talking about complex, arcane ideas and terms that have nothing to do with the “real world,” but which need to be memorized for a test and then forgotten (at least until the final exam). However, students needn’t be wary of theoretical ideas and concepts. Theories are simply good ideas. And good theories are simply good ideas that have been tested through rigorous scientific study and analysis. Where textbooks go wrong is that they stop at theory and read like dictionaries. Or, they focus on theoretical issues related to research rather than practice. However, good management theories (i.e., good ideas) needn’t be complex, difficult
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to understand, or irrelevant. In fact, the late Rensis Likert, of the University of Michigan, once said that there is nothing as practical as a good theory. So, to make sure that you’re exposed to good ideas (i.e., good theories), that you can refer to for practical, theory-driven advice, and which encourage you to put theory-driven knowledge into practice for yourselves, each chapter in this book contains 50 to 60 specific stories and examples that illustrate how managers are using management ideas in their organizations. Let’s use an example from Chapter 8 on Global Management to show you what I mean. One of the key issues in Global Management is successfully preparing employees for international assignments. In fact, the difficulty of adjusting to language, cultural, and social differences in another country is the primary reason that so many businesspersons fail in international assignments. Consequently, you’ll read this passage in Chapter 8.
expatriate Someone who lives and works outside his or her native country.
Mr. Kusumoto is a Japanese expatriate, someone who lives and works outside his or her native country. The cultural shock that he was experiencing is common. The difficulty of adjusting to language, cultural, and social differences is the primary reason for expatriate failure in overseas assignments. For example, although there have recently been disagreements among researchers about these numbers, it is probably safe to say that 5 to 20 percent of American expatriates sent abroad by their companies will return to the United States before they have successfully completed their assignments.91 Of those who do complete their international assignments, about one-third are judged by their companies to be no better than marginally effective.92 Since the average cost of sending an employee on an international assignment can run between $500,000 and $3 million (depending on the length of the d h l f l h b
For example, although there have recently been disagreements among researchers about these numbers, it is probably safe to say that 5 to 20 percent of American expatriates sent abroad by their companies will return to the United States before they have successfully completed international assignments. Of those who do complete their international assignments, about onethird are judged by their companies to be no better than marginally effective.
In other words, this is fairly standard, research-based information. You’ll find it in most textbooks. Is it important for students to know this information? You bet! Is it likely that students will find this and the thousands of other pieces of theory and research-based facts throughout the book particularly compelling or interesting (and thus easier to learn)? Ah, there’s the problem. However, what if we combined theory and research with specific, “real world” stories and examples that illustrated good or poor use of those theories? For instance, the passage shown below is also in Chapter 8, where it follows the research-based information about the difficulty of adjusting to foreign cultures. In his book Blunders in International Business, David Predeparture language and cross-cultural training can reduce the uncertainty Ricks tells the story of an that expatriates feel, the misunderstandings that take place between expatriates American manager working in and natives, and the inappropriate behaviors that expatriates unknowingly the South Pacific who, by hircommit when they travel to a foreign country. Indeed, simple things like using a phone, finding a public toilet, asking for directions, knowing how much things ing too many local workers cost, exchanging greetings, or understanding what people want can become from one native group, untremendously complex when expatriates don’t know a foreign language or a country’s customs and cultures. In his book Blunders in International Business, knowingly upset the balance David Ricks tells the story of an American manager working in the South of power in the island’s tradiPacific who, by hiring too many local workers from one native group, unknowtional status system. The isingly upset the balance of power in the island’s traditional status system. The islanders met on their own and quickly worked out a solution to the problem. landers met on their own and After concluding their meeting at 3 A.M., they calmly went to the manager’s quickly worked out a solution home to discuss their solution with him (time was not important in their culto the problem. After concludture). But, since the American didn’t speak their language and didn’t understand why they had shown up en masse outside his home at 3 A.M., he called in the ing their meeting at 3 a.m., Marines, who were stationed nearby, to disperse what he thought was a “riot.” they calmly went to his home Expatriates who receive predeparture language and cross-cultural training make faster adjustments to foreign cultures and perform better on their internato discuss their solution with 94 tional assignments. Unfortunately, only a third of the managers who go on him (time was not important international assignments are offered any kind of predeparture training, and only in their culture). But, since the American didn’t speak their language, and couldn’t understand why they would show up in mass outside his home at 3 a.m., he called in the Marines, who were stationed nearby, to disburse what he thought was a “riot.” 6.1 Language and Cross-Cultural Training
PREFACE
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After reading this passage, students have a vivid understanding about what can go wrong if people don’t receive cultural and language training before traveling or moving to another country. Why does this help students learn? Because the first passage cites theory and research on the effectiveness of cross-cultural training and the second brings the theory and research alive by indicating what can go wrong if you don’t get that cross-cultural training. Moreover, the stories and examples you’ll read in each chapter are relevant and up-to-date. You’ll read how trendy diets and increased concerns over childhood obesity have caused the cookie industry’s sales to sharply decline (one school district replaced cookies with healthier alternatives, canceling orders for what amounted to 28,000 cookies per day). Drastic changes in consumer consumption have prompted managers at Kraft, maker of Oreo and Chips Ahoy, to rethink how they do business in the cookie category. You’ll learn how Electronic Arts, the producer of popular video games like Madden NFL, uses a long-term strategic plan for recruiting the top talent from the entire gaming industry. You’ll also learn ways in which computer technologies are shaping how companies conduct nearly all aspects of business, from using video game avatars for training simulations, to creating blogs to monitor how employees, customers, and critics perceive and interact with the company. For example, Google uses internal blogs to keep records of brainstorming sessions, thereby creating a time-stamped version of a scientist’s notebook, which allows managers to determine exactly when an idea was generated. You’ll also read about an increasingly popular technique, unsupervised data mining, which is used for identifying meaningful knowledge from extremely large databases. Unsupervised data mining is particularly good at identifying association or affinity patterns, that is, when two or more database elements tend to occur together in a significant way. When Osco Drugs, based in Chicago, used unsupervised data mining, it found that beer and diapers tended to be bought together between 5 p.m. and 7 p.m. The question, of course, was “why?” The answer, on further review, was fairly straightforward: Fathers, who were told by their wives to buy some diapers on their way home decided to pick up a six-pack for themselves, too. Likewise, because Wal-Mart’s data mining indicated that people tend to buy bananas and cereal at the same time, Wal-Mart now places bananas near the cereal aisle, in addition to the fruits and vegetables aisle. As these stories show, each chapter has been updated with dozens of new real world business examples, straight from the latest pages of Business Week, Fortune, Forbes, Fast Company, as well as the Wall Street Journal, the New York Times, other leading newspapers, to help you understand how management concepts are being used. In short, research and theory and stories and examples are important for effective learning. Therefore, this book contains over a thousand specific examples and stories to make management theories and ideas more interesting. So, to get more out of this book, read and understand the theories and theoretical ideas. Then read the stories or examples to learn how those ideas should or should not be used in practice. You’ll find that both are current and up-to-date.
So What’s New? If you are already familiar with the previous editions’ approach of reinforcing research and theory with stories and examples you may be asking yourself, “So what’s new?” The answer is quite a bit. To keep pace with the evolution of management, the Third Edition underwent a rigorous review process that identified areas where I could strengthen and refine the text. Reviewers overwhelmingly preferred the chapters be ordered according to the traditional management model of Planning, Organizing, Leading, Controlling, so the table of contents for the Fourth Edition reflects that concern. Reviewers also indicated that several of the boxed features were not being used in class, so I have
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streamlined each chapter to focus on the main content, retaining only the most popular boxes, “What Really Works?” and “Doing the Right Thing.” For this edition, all eighteen of the “What Would You Do?” chapter-opening cases are new, and feature companies like TiVo, Amazon.com, Wendy’s, Gap, W.L.Gore (creator of Goretex, Glide, and a host of other innovations), JetBlue, Hyundai Motors, and Walgreen’s, among others. To help you be a more ethical manager, I have kept only the best “Doing the Right Thing” boxes. What brand new things will you find in Management, 4e? To start, you’ll find: of Management – The Fourth Edition includes a complete chap➣ History ter on the history of management. Discussions of the theories advanced by Frederick Taylor, Frank and Lillian Gilbreth, Henry Gantt, Max Weber, Henri Fayol, Elton Mayo, Mary Parker Follett, and Chester Barnard are followed by sections on more recent management theories such as operations management, information management, systems management, and contingency management. The chapter contains a full set of end-of-chapter review materials and activities, including videos. Checks – At the end of each chapter, you will find a set of ten ➣ Concept questions to help you determine if you understand the main concepts presented in the chapter. – Each chapter ➣ Self-Assessments has a related assessment questionnaire Self-Assessment SELF-MANAGEMENT A key part of planning is setting goals and tracking progress toward their achievement. As a manager, you will be involved in some type of planning in an organization. But the planning process is also used in a personal context, where it is called self-management. Self-manage ment involves setting goals for yourself, developing a method or strategy to achieve them, and then carrying it out. For some people, self-management comes natu rally. Everyone seems to know someone who is highly
organized, self-motivated, and disciplined. That someone may even be you. If that someone is not you, however then you will need to develop your self-management skills as a means to becoming a better manager. To gain insights into your level of self-management, take the 35-question assessment on page number TK of the Self-Assessment Appendix. That assessment will give you some baseline information as a foundation for your later self-manage ment goals (i.e., where you are now so that you can see what you need to do to get where you want to be).
to help students consider how their own perspectives influence their management skills. A brief description of each assessment tool is given after the “Concept Check” and directs students to the page in the Self-Assessment Appendix where the particular inventory is located. All of the assessments are placed together in the appendix so students can see patterns in their own perceptions and behaviors. Basic scoring information follows each questionnaire, and the Instructor Manual contains directions for using the assessment tools in class.
for Principles of Management – An exciting new ➣ ThomsonNOW electronic study tool, called ThomsonNOW for Principles of Management is available with the Fourth Edition. Students can test their understanding, concentrate their review on their weakest areas, and then verify their progress using the latest technology. Test Bank – To provide you with superior evaluation materials, ➣ Certified a team of professors verified the quality of each of the roughly 3,000 questions in the Test Bank for the Fourth Edition of Management. Then an editorial professional reviewed the question concepts and wording to ensure they matched the presentation in the text, as well as corrected grammatical and typographical errors and page references. You can be confident that whichever questions you choose, they will be solid, unambiguous questions that accurately assess student understanding. Wants to Be a Manager? – Games are an increasingly popular ➣ Who classroom review tool, so the Fourth Edition of Management includes a quiz game that uses JoinIn™ clicker technology. Formatted with PowerPoint, each chapter file has two rounds of 25 questions each, organized into 5 categories per round, similar to the popular television show, Jeopardy! Categories cover all key topics and most key terms discussed in the chapter. Category names are PREFACE
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fun, but the questions in each are serious review of chapter concepts. A mixture of true-false and multiple choice questions keep students working through this enjoyable classroom review.
Pre- and Post-Assessments – Your students will have widely ➣ Course varying understandings of management concepts, which can make teaching your
course a challenge. Depending on what they know (or don't know), you may wish to tailor your course to fill specific gaps in knowledge. Before you can do that, however, you will need to determine your students’ baseline understanding of management principles. We have created a 200-question assessment test on the basic management concepts that students need to understand. Administer the pretest at the beginning of the term. Then as a conclusion to your course, you can administer the 200-question post-test and see how much your students have learned.
So what is new in Management, 4e? Quite a bit.
Book Features A tremendous amount of time and thought went into planning this textbook. I reviewed over 25 top selling textbooks in Management, Marketing, Finance, Statistics, and Economics. I asked more than 200 students and dozens of professors what they specifically liked and disliked about their textbooks. And, I pulled some of my favorite books (m any of which were not about business) from my bookshelf to figure out what made them great books. Only then did I create the plan and organization for Management. The Fourth Edition retains the popular features of previous editions and adds some new ones. So take a few minutes now to familiarize yourself with these features. Doing so will help you get more out of the book and your management class. Would You Do? – Each chapter opens with an engaging case outlin➣ What ing actual management problems facing a well-known company. After students read the case, they are presented several questions to help guide their thinking about the issues, and are ultimately asked “If you were the manager at this company, what would you do?” Putting students in the place of the manager personalizes the dilemma and forces students to solve common managerial problems. The solution to the case, or “What Really Happened?” is in the Instructor Manual. Allowing students to compare what they would have done to what the managers really did provides a great learning opportunity.
HE R IGHT T G T HI IN NG DO
TELL AND SHOW PEOPLE THAT ETHICS MATTER Because managers set the standard for others in the workplace, unethical behavior and practices quickly spread when they don’t do the right thing. One of the most important things managers can do is to tell people that ethics matter. When Charles Holliday, Jr., CEO of Du Pont, was a young manager, he was told by Du Pont's then CEO Dick Heckert, “This company lives by the letter of its contracts and the intent of those contracts.” Said Holliday, “I still remember the expression on his face when he said those words, and I've lived by that philosophy ever since.” In today's business world, however, with one-third of workers reporting that they've seen their bosses lie, steal from the company, or break the law, talk clearly isn't enough. Holliday says, “Just saying you're ethical isn't very useful. You have to earn trust by what you do every day.” So, tell the people whom you manage that ethics matter. Then show them by doing the right thing yourself.31
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the Right Thing – At the U.S. Military Academy, there is a strict ➣ Doing code of conduct: “A cadet will not lie, cheat or steal, nor tolerate those who
do.” The code is concise and unmistakable. Regrettably, there is no equivalent code for managers because there’s no doubt they need one. Numerous studies and well-known corporate scandals, make clear the distressing state of managerial ethics in today’s business world. Lying to stockholders about profits, cheating to win business, and stealing from companies have become all too common. And, because managers set the standard for others in the workplace, unethical behavior and practices quickly spread when they don’t do the right thing. Therefore, in each chapter, you’ll find practical, useful advice to help you become a more ethical manager or businessperson by “Doing the Right Thing.” Topics include ethical competitive analysis, avoiding the slippery slope of cheating, dealing with gifts from suppliers, avoiding conflicts of interest, not cheating on travel expenses, enforcing fair and safe working conditions in foreign factories, giving credit rather than taking it, and many more.
Really Works? – Some studies show that two drinks a day increases ➣ What life expectancy by decreasing your chances of having a heart attack. Yet other studies show that two drinks a day will shorten your life expectancy. For years, we’ve “buttered” our morning toast with margarine instead of butter because it was supposed to be better for our health. However, new studies now show that the trans-fatty acids in margarine may be just as bad for our arteries as butter. Confusing scientific results like these frustrate ordinary people who want to “eat right” and “live right.” It also makes many people question just how useful most scientific research really is. Managers also have trouble figuring out what works, based on the scientific research published in journals like the Academy of Management Journal, the Academy of Management Review, the Strategic Management Journal, the Journal of Applied Psychology, and Administrative Science Quarterly. It’s common for the Wall Street Journal to quote a management research article from one of these journals that says that total quality management is the best thing since sliced bread (without butter or margarine). Then, just six months later, the Wall Street Journal will quote a different article from the same journal that says that total quality management doesn’t work. If management professors and researchers have trouble deciding what works and what doesn’t, how can practicing managers know? Thankfully, a research tool called meta-analysis, which is a study of studies, is helping management scholars understand how well their research supports management theories. Fortunately, meta-analysis is also useful for practicing managers, because it shows what works and the conditions under which management techniques may work better or worse in the “real world.” MetaW H A T R E A L L Y W O R K S analysis is based on the simple idea that if one study shows that a Conscientiousness: The Organized, Hardworking, management technique Responsible Personality doesn’t work and another study shows that Conscientious people are organized, hardworking, JOB PERFORMANCE responsible, persevering, thorough, and achievement There is a 66 percent chance that conscientious workit does, an average of oriented. Who wouldn’t want to hire people with these ers will be better at their jobs than less conscientious personality traits? Indeed, 92 studies across five occu- workers.101 those results is probapational groups (professionals, police, managers, sales, and skilled/semiskilled jobs) with a combined total of Probability of Success bly the best estimate of 12,893 study participants indicated that, on average, 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% conscientious people are inherently more motivated and how well that manageprobability of success 66% are better at their jobs. ment practice works (or MOTIVATIONAL EFFORT doesn’t work). FortuThere is a 71 percent chance that conscientious workers will be more motivated and will work harder than less nately, you don’t need a conscientious workers. Ph.D. to understand the Probability of Success 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% statistics reported in a probability of success 71% meta-analysis. In fact, one primary advantage of meta-analysis over traditional significance tests is that you can convert meta-analysis statistics into intuitive numbers that anyone can easily understand. Indeed, each meta-analysis reported in the “What Really Works?” sections of this textbook is accompanied by an easy-to-understand statistic called the probability of success. As its name suggests, the probability of success uses a bar graph and a percentage (0 percent to 100 percent) to indicate the likelihood that a management technique will actually work. Of course, no idea or technique works every time and in every circumstance. However, in today’s competitive, fast-changing, global marketplace, few managers can afford to overlook proven management strategies like those discussed in the “What Really Works?” feature of this book.
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Two Videos – When we asked professors how they used video in the ➣ Take class room, we discovered two distinct preferences. Some like to use short video examples to reinforce certain points in the chapter; others like longer video cases that looked at various companies in-depth. In response to this feedback, each chapter of Management, 4e contains two video options. The first is a film clip from a popular Hollywood movie that relates to the chapter content. For example, students will see a “Biz Flix” clip from In Good Company for Chapter 2 on History of Management, from The Bourne Identity for Chapter 5 on Planning, from October Sky for Chapter 7 on Innovation, and from Casino for Chapter 15 on Managing Service and Manufacturing Operations, to name a few. The second video option is a longer segment based on a single company. We take you inside some of the most successful privately held companies in the United States, including Modern Postcard, Auntie Anne’s pretzels, Wahoo’s Fish Taco, Ziba Design, Sundance Catalog, and two-time Baldrige National Quality Award winner Texas Nameplate. These longer segments, called ”Management Workplace,” last an average of 12 minutes and provide a deeper look at a single company, its operations, and how it addresses various management issues everyday. Both the “Biz Flix” and the “Management Workplace” video guide students on what to look for and think about as they watch the video. Detailed teaching notes for both videos are in each chapter of the Instructor Manual.
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Pedagogy Pedagogical features are meant to reinforce learning, but they don’t have to be boring. Accordingly, the teaching tools used in Management will help students learn and hold their interest, too. Outline and Numbering System, Learning Objectives, ➣ Chapter and Section Reviews – Because of their busy schedules, very few students have the opportunity to read a chapter from beginning to end in one sitting. Typically, it takes students anywhere from two to five study sessions to completely read a chapter. Accordingly, at the beginning of each chapter, you’ll find a detailed chapter outline in which each major part in the chapter is broken out into numbered sections and subsections. For example, the outline for the first part of Chapter 4, on Ethics and Social Responsibility, looks like this:
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What Is Ethical and Unethical Workplace Behavior? 1 Ethics and the Nature of Management Jobs 2 Workplace Deviance 3 U.S. Sentencing Commission Guidelines 3.1 Who, What, and Why? 3.2 Determining the Punishment
What Would You Do? What Is Ethical and Unethical Workplace Behavior? 1. Ethics and the Nature of Management Jobs 2. Workplace Deviance 3. U.S. Sentencing Commission Guidelines for Organizations 3.1 Who, What, and Why? 3.2 Determining the Punishment
How Do You Make Ethical Decisions? 4. Influences on Ethical Decision Making 4.1 Ethical Intensity of the Decision 4.2 Moral Development 4.3 Principles of Ethical Decision Making
5. Practical Steps to Ethical Decision Making 5.1 Selecting and Hiring Ethical Employees
5.2 Codes of Ethics 5.3 Ethics Training 5.4 Ethical Climate
What Is Social Responsibility? 6. To Whom Are Organizations Socially Responsible? 7. For What Are Organizations Socially Responsible? 8. Responses to Demands for Social Responsibility 9. Social Responsibility and Economic Performance Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
The numbered information contained in the chapter outline is then repeated in the chapter as learning objectives (at the beginning of major parts of the chapter) and as numbered headings and subheadings (throughout the chapter) to help students remember precisely where they are in terms of the chapter outline. Finally, instead of a big summary at the end of the chapter, students will find detailed reviews at the end of each section. Together, the chapter outline, numbering system, learning objectives, section headings (which mark the beginning of a section), and section reviews (which mark the end of a section) allow students to break the chapter into smaller, self-contained sections that can be read in their entirety over multiple study sessions. Furthermore, the numbered headings and outline should make it easier for instructors and students to know what is being assigned or discussed in class (“In section 3.1 of chapter 3…”).
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Tip – Knowing how to study effectively is not an innate talent. So, ➣ Study to prepare students for studying the material, a detailed study tip appears in the chapter opener. Eighteen different tips give students many options for reviewing key concepts and mastering chapter content. Students are challenged to write their own tests and exchange them in a study group, recreate chapter exhibits using the worksheets on Xtra!, explain the chapter concepts to a friend who is not in class, cut up the text glossary to make a quiz-bowl STUDENT RESOURCES game, and much more.
STUDY TIP
ThomsonNOW On the Job and
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Student Resources – The Management package has many resources to help reinforce the concepts in each chapter. For that reason, the opening of each chapter includes a list of various study tools and where they can be found. Each list contains information about ThomsonNOW, Xtra!, and the student Web site.
Biz Flix video applications, concept tutorial, and concept exercise
Xtra! Eight exhibit worksheets, author FAQs, quiz, Management News, and the video clips from the chapter with exercises Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
Updated Exhibits – Every exhibit in the Third Edition was evaluated to ➣ determine if it could be rendered in a way that was more illustrative of the
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concept it was meant to support. As a result, dozens of exhibits in the Fourth Edition were revised Exhibit 2.3 General and Specific Environments and are now visually appealing. For example, the Third f General Env n ts o iron on e me mp Tec nt Edition used the following exo C hn olo gi Specific E f y c hibit to depict the general and o nvi m nts ro ne nm Com po rs specific environments facing a e p eti om to st company: nizatio rga n Co m
Studying for comprehensive exams doesn’t have to be a chore. Form a study group. Photocopy the glossary at the end of this text, and cut the copies into strips, one term per strip. Put all strips into a large bowl. Divide into two teams and have one team at a time draw out a strip. Quiz the opposing team and then read the correct answer. You can do the same with the chapter outlines at the beginning of each chapter. You can tabulate points, but you’ll all win!
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Chapter 3: Organizational Environments and Cultures
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For the Fourth Edition, the diagram illustrating general and specific environments is more graphic, providing a better visual summary of the concept. The pictures and organization of the new exhibit, shown at left help students visualize the complete management environment better than the divided circle of the old exhibit. The new diagrams not only make the text more engaging, but they connect more clearly to the explanation of the concept in the text.
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Terms – Key terms appear in boldface in the text, with definitions in ➣ Key the margins to make it easy for students to check their understanding. A complete alphabetical list of key terms appears at the end of each chapter as a study checklist, with page citations for easy reference. Key Terms balanced scorecard, 535 balance sheets, 537 behavior control, 531 benchmarking, 525 budgets, 539 bureaucratic control, 530 cash flow analysis, 537 concertive control, 533 concurrent control, 527
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control, 524 control loss, 528 customer defections, 542 cybernetic, 526 cybernetic feasibility, 529 economic value added (EVA), 539 feedback control, 527 feedforward control, 527 financial ratios, 539
income statements, 537 normative control, 532 objective control, 531 output control, 531 regulation costs, 528 self-control (self-management), 534 standards, 524 suboptimization, 536 value, 543
End-of-Chapter Assignments In most textbooks, there are only two or three end-of-chapter assignments. By contrast, at the end of each chapter in Management, there are five assignments from which to choose. (But if you count the opening case, “What Would You Do?”, and its answer, “What Really Happened?”, it’s really six assignments.) This gives instructors more choice in selecting just the right assignment for their classes. It also gives students a greater variety of activities, making it less likely that they’ll repeat the same kind of assignment chapter after chapter. Concept Check 1. Compare an organizational structure and an organizational process. 2. What five methods have traditionally been used to departmentalize work and workers? Give one advantage and one disadvantage of each type. 3. How do managers generally describe organizational authority? 4. When delegating work, what is the relationship between responsibility, authority, and accountability? 5. Why do companies use job specialization? How can specialized jobs be modified to eliminate the boredom and low job satisfaction associated with them?
6. What is main concern of the job characteristics model? 7. What differentiates a mechanistic organization from an organic organization? 8. How do companies use reengineering to redesign organizational processes? 9. How do formal workplaces differ from informal workplaces? 10. What are the differences between modular and virtual organizations? What are their advantages and disadvantages?
Check – A set of 10 ques➣ Concept tions act like concept flash cards, allowing students to give themselves a quick quiz to determine how well they understand the main ideas in the chapter. – As described ➣ Self-Assessment above, each chapter has a “SelfAssessment” questionnaire that helps students explore their own management perspectives.
Management Decision GARBAGE JOBS Glancing at the newspaper machine in the lobby, you are happy to see the headline proclaiming the end of the garbage collectors’ strike in a nearby city.73 That kind of strike tends to have a ripple effect on neighboring areas, and as the manager of a private waste collection company in the region, you breathe a sigh of relief. Nonetheless, as you walk to your office, you can’t help thinking about the job of your garbage collectors. It’s repetitive, hot (or cold, depending on the season), anonymous, and relatively thankless. Your employees work in pairs, so each truck has one driver and one “thrower”—not much variety for either worker. There’s not much on-the-job interaction either, as the driver is in the cab and the thrower rides on the back of the
truck. And with the company looking into purchasing newer trucks that automatically lift and dump the garbage cans, you may even go to one person per truck. In addition, to minimize the time it takes to collect the trash, you assign each team to the same neighborhood week after week. That ensures maximum efficiency: drivers subconsciously time traffic lights, pace themselves for starts and stops, and know the route without needing to consult a map. Even when collectors know the route, the work can be grueling. Each route has to be finished each day; no one will tolerate garbage left on the curb after the assigned pickup day. So, even if a traffic accident or construction brings traffic to a standstill, the garbage has to be collected each day according to schedule.
Decision – “Man➣ Management agement Decision” assignments are fo-
cused on a particular decision. Students must decide what to do in the given situation and then answer several questions to explain their choices. For example, students must decide whether to give a new employee a raise before company policy allows, if the company should permit camera phones in the office, whether to use personality tests as part of hiring and promotion decisions, if creating a workplace blog is worth the effort, whether to mine employees’ personal data to find out how to motivate them, and more. Some “Management Decision” features have optional extensions that turn the exercises into mini-projects. Information on how to do that is in the Instructor Manual. PREFACE
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Team Decision – ➣ Management “Management Team Decision” as-
Management Team Decision
signments are similar to “Management Decision” assignments in that students face a problem, must decide what to do, and then answer several questions to explain their choices. The difference, however, is that “Management Team Decision” assignments are designed to be completed by student teams or groups. Teams have the opportunity to practice the group decision-making techniques outlined in Chapter 5 (Planning and Decision Making). Student management teams will decide whether to implement a shopper card program at a chain of independent supermarkets, consider the pros and cons of becoming a Wal-Mart supplier, build a balanced scorecard for H & R Block, map a strategy for Paramount Pictures, determine the role of innovation at Colgate-Palmolive, and more.
DOG DAY BLUES One of the reasons you accepted a management position at MicroTek several years ago was the company’s laidback culture.101 A loose organizational structure enables employees to move freely between projects, and the open office space encourages informal encounters and generates a feeling of teamwork. And among the very generous corporate perks is a policy allowing employees to bring their pets to work. It is not uncommon to see a small animal sitting in an employee’s inbox drinking from a hamster lick. Several employees bring their dogs, large and small, to the office. As the company has grown, thanks in part to its informal culture, more and more people are taking advantage of the pet policy, and problems are arising.
Food is swiped from desks, animals are rooting through trash bins, and dogs are marking territory on the partitions that surround their owners’ desks. Visiting customers often try to mask startled (at best) or disapproving (at worst) looks when they tour your facility for the first time—and even the second and third times. During a recent breakfast meeting, when a board member refused to share her bagel with the CFO’s dog, the dog relieved itself on her briefcase. At least one employee has complained of allergic reactions due to the high levels of pet dander in the office air, but rather than change the policy, you installed a high-power air cleaner. Despite the challenges, you have resisted changing the pet policy because it symbolizes both the company’s
Your Career Potential – “Develop Your Career Potential” ➣ Develop assignments have one purpose: To help students develop their present and future capabilities as managers. What students learn through these assignments is not traditional “book-learning” based on memorization and regurgitation, but practical knowledge and skills that help managers perform their jobs better. Assignments include interviewing managers, dealing with the press, conducting a personal SWOT analysis, learning from failure, developing leadership skills, 360-degree feedback, and more.
Develop Your Career Potential SPARK YOUR OWN CREATIVITY Creativity is a vital part of every organization—and not just the whiz-bang, multimillion-dollar type of creativity.95 Even banal tasks can benefit from a new approach: an office assistant may think creatively about how to manage the company’s filing system or figure out a simple way to keep track of who is in and out of the office. A Chicago company called Inventables has developed innovation kits—boxes containing disparate items to spark creativity—which it sells to clients like Procter & Gamble and Motorola four times a year. The idea is that designers and engineers will be inspired by tinkering with the contents of the kits. You don’t need Inventables to become inspired, however. Nor do you have to wait for your company to develop a creative work environment before you can become creative. You can spark your own creativity and think “outside the box” on your own. A Cincinnati-based company called Eureka Ranch uses toys to help adults remember how to be imaginative, and its long client list of Fortune 500 companies is a testament to founder Doug Hall’s methods. Another company,
Mindware, specializes in educational activities and toys that can help adults regain access to their imaginations. Just looking through its catalog of erector sets, science sets, puzzle books, strategy games, and tangrams may be enough to get your juices flowing. Activities 1. Visit http://www.eurekaranch.com and listen to the audio clip of what the company does and how it does it. What do you think of the three dimensions of creativity? 2. At the Eureka Ranch Web site, visit the page on Brain Brew. What is Brain Brew Radio? Is it available in your area? If it is, consider listening to it once a month to hear the creative ideas that people across the country are working on. 3. Visit http://www.mindwareonline.com and peruse some of the products the company sells. Which products do you find most appealing? If it's in your budget, order one of the items as a tool to help you develop and refine your creative side.
for Principles of Management – ThomsonNOW for ➣ ThomsonNOW principles of Management is an online assessment-driven and student-centered tutorial that provides students with a personalized learning plan. Based on a diagnostic Pre-Test, a customized learning path is generated for each student that targets their study needs and helps them to visualize, organize, practice, and master the material in the text. Media resources enhance problem-solving skills and improve conceptual understanding. An access code access to ThomsonNOW for Principles of Management can be bundled with new textbooks.
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Instructor Supplements Instructor Manual – The instructor manual to accom➣ Comprehensive pany the Fourth Edition has been completely redone to help instructors in every type of class. In addition to the chapter outlines, additional activities, and solutions you expect, the new manual includes one pedagogy grid and three lesson plans per chapter. Each chapter of the instructor manual opens with a pedagogy grid that details all of the pedagogy in the chapter and the companies and teaching points presented. By giving you all the options you have in the chapter and the chapter content addressed by each option, you will be able to decide what you want to emphasize in class and the work you want to assign your students. Following the pedagogy grid is a series of three lesson plans: a lecture lesson plan, including lists of Power Point slides and acetates; a group-work lesson plan for professors who have smaller sections and/or more time during the semester; and a complete video lesson plan, including pre-viewing, viewing, and post-viewing activities for both “BizFlix” and “Management Workplace.” The purpose of the video-only lesson plan is to illustrate how to teach using video without “losing time.” Each type of lesson plan includes pre-class preparation for professor and for students; how to organize the content for the chapter during the class period; a list of possible assignments; and more. A detailed chapter outline (lecture notes) is still part of the instructor manual. The lecture notes include additional examples, teaching notes for key concepts and for feature boxes, prompts where relevant Power Point slides and transparencies correspond to chapter content, as well as prompts for where to show the video. Solutions for chapter features are included. In addition to all of these teaching tools, an appendix titled, “Teaching Your First Management Course,” can be found at the end of the instructor manual. This appendix is designed specifically to meet the needs and concerns of the first-time instructor.
Test Bank – The Test Bank for the Fourth Edition of Manage➣ Certified ment builds on the solid foundation of previous editions. A team of professors reviewed the entire test bank to verify the quality of each question. Then an editorial professional verified that the question concepts and wording matched the presentation in the text, as well as corrected grammatical and typographical errors and page references. Each test bank chapter contains at least 150 questions in a variety of types: true-false, multiple-choice, shortanswer, critical-thinking questions, and a scenario section that asks students to answer questions based on detailed management situations, including on the chapter-opening “What Would You Do?” case. Thorough solutions are provided PREFACE
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for each question, including difficulty ratings and page references where solutions appear in the text. A correlation table at the beginning of each test bank chapter makes it easy for instructors to select the appropriate mix of questions for their students. A computerized version of the text bank is available on your Instructor Resource CD-ROM and by special request. ExamView allows to you create, edit, store, print, and otherwise customize your quizzes, tests, and exams. The system is menu-driven making it quick and easy to use. Pre- and Post-Assessments – To help you better determine ➣ Course your students’ baseline understanding of management principles, we have created an assessment test for your use at the beginning of the term. The 200question pre-test covers the basic management concepts that students need to understand. As a conclusion to your course, you can administer the 200-question post-test. These tests are designed to help you track your students’ proficiency levels semester to semester. Pre- and post-assessments are also broken down by chapter, so if you prefer, you can administer throughout the semester for each chapter of the text. Assessment tests are available in both Word and ExamView formats. – A computerized version of the Test Bank (called ExamView) is ➣ ExamView available on your Instructor Resource CD-ROM and by special request. ExamView allows you to add or edit questions, instructions, and answers. You can create, edit, store, print, and otherwise customize all your quizzes, tests, and exams. The system is menu-driven, making it quick and easy to use.
Two Video – Nothing helps students master management concepts ➣ Take like seeing them put into practice in the real world. New videos from Small
Business School, a program broadcast nationally on PBS, give an extensive look into the workings of interesting and successful companies like Wahoo’s Fish Taco, Diversified Chemical, Black Diamond, makers of outdoor gear, Tires Plus, and Boston Duck Tours, the largest tourist attraction in the state of Massachusetts. In addition to these longer segments, each chapter has a movie clip that ties into the management concepts presented in the chapter. Clips are short, so you can view and review them easily and quickly. Both the “Biz Flix” and “Management Workplace” videos are available through Xtra!, on DVD, and on VHS. The Instructor Manual includes detailed teaching notes so that you can incorporate video into your class in a meaningful way.
Slides – A rich set of PowerPoint slides, with teaching ➣ PowerPoint notes, will make class preparations easy and interesting. The approximately ®
30 to 50 slides per chapter cover all key concepts, terms, features, cases, and even some exhibits from the text. Animations and transitions add movement to many of the slides, allowing instructors to show one point at a time and adding a dynamic feel that will hold student interest throughout the presentation. Ample teaching notes offer additional insights and examples plus important points to cover in lectures. For instructors wishing to integrate various media, we have also created a set of video PowerPoint slides in which the “BizFlix” movie clips are embedded in appropriate slides. And to support the new Self-Assessment Appendix, we have created a separate set of PowerPoint files that enable professors to use the assessment inventories in the classroom setting. In each Self-Assessment PowerPoint chapter, individual assessment items are placed on separate slides. Excel spreadsheets embedded on each slide allow instructors to use the data from a simple show of hands to create distributions for each assessment item. Students can see where they fit in the distribution, making the assessment tool more interesting and relevant.
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on TurningPoint . In addition to the PowerPoint presentations ➣ JoinIn™ described above, Management, 4e offers another, truly interactive PowerPoint ®
possibility through JoinIn. This unique presentation incorporates interactive audience response slides into the lecture slides for each chapter. Combined with your choice of several leading keypad systems, JoinIn enables your students to respond to multiple-choice questions, short polls, interactive exercises, and peer-review questions—all with a simple click on a hand-held device. You can take attendance, check student comprehension of difficult concepts, collect student demographics to better assess student needs, and even administer quizzes without collecting paper or grading. You can create additional interactive slides to customize your presentation to fit your particular course needs. This interactive tool is available to qualified college and university adopters. For more information, contact your Thomson representative or visit http://turningpoint.thomsonlearningconnections.com.
Who Wants to Be a Manager? – Games are an increasingly popular ➣ classroom review tool, so the Fourth Edition of Management includes a quiz
game that uses JoinIn™ clicker technology. Each chapter has two rounds of 25 questions each, organized into 5 categories. Category names are fun, but the questions in each category are serious review of chapter concepts. A mixture of true-false and multiple choice questions keep students working through this enjoyable classroom review. Transparencies – For adopters ➣ Acetate without access to PowerPoint, a set of over 100 transparencies is available upon request. These transparencies can supplement lectures by displaying the key illustrations from the text. Resource CD-ROM (IRCD) – ➣ Instructor For your convenience, the Instructor Manual, Test Bank, ExamView Software, PowerPoint presentations, and Who Wants to Be a Manager are available on a single CD-ROM, the IRCD.
The Business and Company Resource Center – Put a complete ➣ business library at your fingertips with the Business & Company Resource Center (BCRC). The BCRC is a premier online business research tool that allows you to seamlessly search thousands of periodicals, journals, references, financial information, industry reports, company histories, and much more. The BCRC is a powerful and time-saving research tool for students—whether they are completing a case analysis, preparing for a presentation, creating a business plan, or writing a reaction paper. Instructors can use the BCRC like an online coursepack, quickly and easily assigning readings and research projects without the inconvenience of library reserves, permissions, and printed materials. BCRC filters out the ‘junk’ information students often find when searching the Internet, providing only the high quality, safe, and reliable news and information sources. Visit http://bcrc.swlearning.com to learn more about how this powerful electronic tool integrates a diverse collection of resources to reflect the natural research process and contact your local representative to learn how to include the Business & Company Resource Center with your text.
Web Tutor™ (for both WebCT , and Blackboard ) – Online learn➣ ing is growing at a rapid pace. Whether you are looking to offer courses at ®
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distance or to offer a Web-enhanced classroom, South-Western/Thomson Learning offers you a solution with WebTutor. WebTutor provides instructors with text-specific content that interacts with the two leading systems of higher education course management – WebCT and Blackboard.
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WebTutor is a turnkey solution for instructors who want to begin using technology like Blackboard or WebCT but who do not have Web-ready content available, or who do not want to be burdened with developing their own content. WebTutor uses the Internet to turn everyone in your class into a front-row student. WebTutor offers interactive study guide features such as quizzes, concept reviews, flashcards, discussion forums, additional video clips, and more. Instructor tools are also provided to facilitate communication between students and faculty. Web site (http://williams.swlearning.com) – The ➣ Williams Williams Web site contains a wealth of resources for both instructors and students. Here is what’s available only for professors at the Instructor Resource page of the Williams Web site: ■ A Resource Integration Guide that shows you how to use the various elements in the supplement package to design a successful course. ■ The full PowerPoint presentations with teaching notes. ■ Files for the full Test Bank. ■ Files for the full Instructor Manual are also available online. If you don’t have your materials on hand, you can download the chapters you need and customize them to suit your lesson plan. Here is what’s available for students at the Williams Web site: ■ An abridged set of PowerPoint slides to help with review ■ A 10-question quiz for each chapter ■ Key terms with definitions
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Student Supplements Xtra! – The Fourth Edition of Williams Xtra! provides access to a ➣ Williams robust set of additional online learning tools. New and exciting content and review opportunities include: ■ Digitized “Biz Flix” and “Management Workplace” videos with questions ■ 15 to 20 interactive quiz questions for each chapter. ■ Links to InfoTrac® College Edition (http://www.infotrac.swlearning.com) to help students with research. ■ Worksheets for most of the exhibits in the text. Blank exhibits are paired with instructions for completing them. Students can use these as review tools for mastering the management concepts in each chapter. ■ Author Insights video clips, in which the author responds to Frequently Asked Questions in each chapter. ■ Access to Experiencing Management, by Dennis Middlemist, which reinforces key management principles in a dynamic learning environment by exposing the learner to the central constructs of each topic through text, animated models or graphs, audio narration, and a variety of interactive activites and applications. Xtra! requires Internet Explorer or Netscape Navigator 3.0 or higher. – Packaged free with every new copy of Management, 4e is a pass➣ InfoTrac word for the InfoTrac database by Gale Research. InfoTrac enables students to connect with the real world of management through academic journals, business and popular magazines and newspapers, and a vast array of government publications. InfoTrac was used to create the end-of-chapter activities in each chapter; students can use InfoTrac for working through the “Management Decisions” at the end of each chapter. Street Journal Edition – This Wall Street Journal edition makes it ➣ Wall easy to bring the real world into the classroom, providing numerous opportunities to relate economic concepts to daily news stories. Every new copy of Management, 4e includes a card entitling students to free subscriptions to the Wall Street Journal and WSJ.com, giving students access to many articles used as examples in this textbook. Instructors with seven or more students who redeem their subscription offers will receive their own free subscription.
Acknowledgments Let’s face it, writing a textbook is a long and lonely process. It’s surely the most difficult (and rewarding) project I’ve ever tackled. And, as I sat in front of my computer with a rough outline on the left side of my desk, a two-foot stack of journal articles on the floor, and a blank screen in front of me, it was easy at times to feel isolated. But, as I found out, a book like this doesn’t get done without the help of many other talented people. First, I’d like to thank the outstanding team of supplement authors: Hal Babson and John Bowen (Columbus State Community College) and Murray Brunton PREFACE
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(Central Ohio Technical College), who wrote the quiz materials for the WebTutor products; Thomas K. and Betty Pritchett (Kennesaw State University), for the outstanding test bank; Deb Baker (Texas Christian University), for the superb PowerPoint slides; and Matthew Cocks (Convergys Corporation), who developed the “Who Wants to Be a Manager” game. I’d like to thank the world-class team at Thomson South-Western for the outstanding support (and patience) they provided while I wrote this book; John Szilagyi, who heads the Management group at South-Western, was calm, collected, and continuously positive through the major ups and downs of this project; Kimberly Kanakes, who was in charge of marketing the book, did an outstanding job of developing marketing themes and approaches; and Amy McGuire; who managed the production process, was consistently upbeat and positive with me when I deserved otherwise. Authors are prone to complain about their publishers. But that hasn’t been my experience at all. Pure and simple, everyone at South-Western has been great to work with throughout the entire project. However, special thanks on this team goes to Jamie Gleich Bryant, of B-books, who was my developmental editor and with whom I had the most contact while writing the book. Jamie worked with reviewers, edited the manuscript, managed the development of supplements, provided superb feedback and guidance at every stage of the book, and nudged and prodded me to write faster, make improvements, and maintain the high quality standards that were set when I began writing. Jamie’s enthusiasm, professionalism, commitment, and attention to detail made me a better writer, made this a better book, and made me appreciate my good fortune to work with such an outstanding talent. Thanks, Jamie, and here’s to many more editions. I’d like to thank an excellent set of reviewers whose diligent and thoughtful comments helped shape the earlier editions and whose rigorous feedback improved the Fourth Edition. Ali Abu-Rahma
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PREFACE
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Finally, my family deserves the greatest thanks of all for their love, patience, and support. Writing a textbook is an enormous project with incredible stresses and pressures on authors as well as their loved ones. However, throughout this project, my wife, Jenny, was unwavering in her support of my writing. She listened patiently, encouraged me when I was discouraged, read and commented on most of what I wrote, gave me the time to write, and took wonderful care of me and our children during this long process. My children, Benjamin, Rebecca, and Zack, also deserve special thanks for their patience and for understanding why Dad was locked away at the computer for all of this time. While writing this book has been the most rewarding professional experience of my career, it pleases me no end that my family is as excited as I am that it’s done. So, to Jenny, Benjamin, Rebecca, and Zack. The book is done. Let’s play.
Meet the Author:
Chuck Williams Texas Christian University Chuck Williams is an Associate Professor of Managementat the M.J. Neeley School of Business at Texas Christian University, where he has also served as an Associate Dean and the Chair of the Management Department. He received his B.A. in Psychology from Valparaiso University, and specialized in the areas of Organizational Behavior, Human Resources, and Strategic Management while earning his M.B.A and Ph.D. in Business Administration from Michigan State University. Previously, he taught at Michigan State University and was on the Faculty of Oklahoma State University. His research interests include employee recruitment and turnover, performance appraisal, and employee training and goal-setting. Chuck has published research in the Journal of Applied Psychology, the Academy of Management Journal, Human Resource Management Review, Personnel Psychology, and the Organizational Research Methods Journal. He was a member of the Journal of Management’s Editorial Board, and serves as a reviewer for numerous other academic journals. He was also the webmaster for the Research Methods Division of the Academy of Management (http://www.aom.pace.edu/rmd). Chuck is also a co-recipient of the Society for Human Resource Management’s Yoder-Heneman Research Award. Chuck has consulted for a number of organizations, General Motors, IBM, JCPenney, Tandy Corporation, Trism Trucking, Central Bank and Trust, StuartBacon, the City of Fort Worth, the American Cancer Society, and others. He has taught in executive development programs at Oklahoma State University, the University of Oklahoma, and Texas Christian University. Chuck teaches a number of different courses, but has been privileged to teach his favorite course, Introduction to Management, for nearly 20 years. His teaching philosophy is based on four principles: (1) courses should be engaging and interesting; (2) there's nothing as practical as a good theory; (3) students learn by doing; and (4) students learn when they are challenged. The undergraduate students at TCU's Neeley School of Business have named him instructor of the year. He has also been a recipient of TCU's Dean's Teaching Award. PREFACE
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PREFACE
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Part 1 Introduction to Management CHAPTER 1
Management 2 CHAPTER 2
The History of Management 32 CHAPTER 3
Organizational Environments and Cultures 68 CHAPTER 4
Ethics and Social Responsibility 98
Management
C H A P T E R
O U T L I N E
Chapter1 What Would You Do? What Is Management? 1. Management Is . . . 2. Management Functions 2.1 2.2 2.3 2.4
Planning Organizing Leading Controlling
What Do Managers Do? 3. Kinds of Managers 3.1 3.2 3.3 3.4
Top Managers Middle Managers First-Line Managers Team Leaders
4. Managerial Roles 4.1 Interpersonal Roles 4.2 Informational Roles 4.3 Decisional Roles
What Does It Take to Be a Manager? 5. What Companies Look for in Managers
6. Mistakes Managers Make 7. The Transition to Management: The First Year Why Management Matters 8. Competitive Advantage through People Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise
Xtra! Five worksheets based on the chapter exhibits, author-answered FAQs, quiz, Management News, and video clips with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and the glossary of terms for this chapter
Headquarters, Amazon.com, Seattle, Washington.1 From the start, Amazon.com has been in a hurry to be a success. According to company founder and chief executive officer (CEO) Jeff Bezos, “Our initial strategy was very focused and very unidimensional. It was GBF: Get big fast. We put that on our shirts at the company picnic.” With billions to spend from its initial stock offering (Amazon’s stock quickly rose to over $100 per share), Amazon spent $400 million to build eight high-tech warehouses across the country. Why spend that much for warehouses? In theory, each was capable of shipping 60 million items per year, and Amazon needed to control the entire buying transaction, beginning with online ordering, proceeding to quick warehouse handling and boxing, and ending with timely shipping and delivery. And, believing that their growth would parallel its own, Amazon then spent $350 million to buy large shares of two Internet retailers, Kozmo.com and Pets.com. Kozmo.com promised the ability to deliver thousands of items from gourmet foods to CDs and movies to customers’ homes in 11 major cities within one hour after an order was placed. Pets.com was supposed to grow because Americans spend over $30 billion a year on their pets and the pet industry, comprised largely of small family-owned stores, was not yet dominated by a “big box” retailer like Home Depot. Unfortunately, Amazon grew so fast that it soon lost control of the basics. Despite the billions it had raised, Amazon burned money so quickly that it had to issue bonds to raise another $2.2 billion to keep the company running. Still, it had only enough business and cash to run six of those new warehouses. Consequently, the company took a $400 million loss to close two of the warehouses and lay off 1,500 people. Furthermore, the six remaining warehouses were poorly run. Defective products, which should have been returned to manufacturers, sat on the shelves wasting space. Mystery orders, like a truckload of unordered kitchen knives, kept showing up. Instead of declining the deliveries, workers put whole truckloads of unordered items on the shelves. Amazon’s frustrated chief of operations said, “We kept it all—we just kept it. We put it on the shelf and said, ‘I don’t know.’ ” In fact,
What Would You Do?
Amazon had so much unsold inventory in its warehouses that CEO Bezos sent out an email with a point-blank message, “Get the crap out.” Finally, Amazon’s $350 million investment in Kozmo.com and Pets.com evaporated when both filed for bankruptcy. Amazon’s problem was not its sales, which were growing exponentially, but rather that it was poorly managed. As a result, its stock, once valued at over $100 per share, dropped to a low of $6. As for profits, founder Bezos cautioned patience, saying, “ Look at USA Today; it took 11 years to become profitable.” However, Amazon has lost over $3 billion since its inception. STUDY TIPS Although the company has Use your textbook more like a finally earned its first profits, notebook and less like a refthat profit amounted to only $5 erence book. The margins are million on $1.12 billion in sales in its fourth quarter (October to a great place for writing quesDecember), and Amazon still tions on content you don’t lost $45 million for the year. understand, highlighting Furthermore, it still has longimportant concepts, and term debt of $2.2 billion to pay adding examples to help you off at the rate of $120 million per year. Results like these remember the material. would have cost any other Writing in your book makes it CEOs their jobs. If Amazon is a more comprehensive ultimately to survive and be resource for management and profitable, what does it need to a better study tool. do to become a more efficiently run company? With nearly a Learning a new subject can be billion in losses because of challenging. To help you poor decisions (i.e., overbuilt master the principles in this warehouses and failed investtextbook, each chapter ments in dotcom companies), opener contains a student what changes does Amazon need to make to ensure that its resource list that alerts you to managers and executives make the materials outside your better decisions? Finally, misbook that can help you better takes are inevitable at all understand assignments, companies, especially ones work on group projects, and that experience hypergrowth like Amazon. So how can study for tests and exams. Amazon do a better job of taking corrective action so that it can quickly and consistently fix what’s going wrong? If you were in charge at Amazon.com, what would you do?
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4
Part 1: Introduction to Management
The management issues facing Amazon.com are fundamental to any organization: How do we plan to get things done, organize the company to be efficient and effective, lead and motivate employees, and put in place controls to make sure our plans are followed and our goals are met? Good management is basic to starting a business, growing a business, and maintaining a business once it has achieved some measure of success. This chapter begins by defining management and discussing the functions of management. Next, we look at what managers do by examining the four kinds of managers and reviewing the various roles that managers play. Then we investigate what it takes to be a manager by reviewing management skills, what companies look for in their managers, the most serious mistakes managers make, and what it is like to make the tough transition from being a worker to being a manager. We finish this chapter by examining the competitive advantage that companies gain from good management. In other words, we end the chapter by learning how to establish a competitive advantage through people.
What Is Management? Mistake #1. A high-level bank manager reduces a marketing manager to tears by angrily criticizing her in front of others for a mistake that wasn’t hers.2 Mistake #2. A Dairy Queen employee sits next to a customer, pulls down her top, bites her, and declares, “I am like Dracula.” Why is this a management mistake? Because the employee wasn’t fired six months before when he attacked a female coworker.3 Mistake #3. Telecommunications company WorldCom announces that it deceived the public, its stockholders, and government regulators by intentionally overstating profits by as much as $9 billion and that it extended $366 million in personal loans to its former CEO Bernie Ebbers, which he used to pay off his personal investment losses. (Imagine losing $100,000 in the stock market and asking your company to lend you money to cover the loss!)4 Ah, bad managers and bad management. Is it any wonder that companies pay management consultants nearly $150 billion a year for advice with basic management issues, such as how to lead people effectively, organize the company effeciently, and manage large-scale projects and processes.5 This textbook will help you understand some of the basic issues that management consultants help companies resolve (and it won’t cost you billions of dollars). 1 2
1
management Getting work done through others.
After reading the next two sections, you should be able to describe what management is. explain the four functions of management.
MANAGEMENT IS . . .
Many of today’s managers got their start welding on the factory floor, clearing dishes off tables, helping customers fit a suit, or wiping up a spill in aisle 3. Similarly, lots of you will start at the bottom and work your way up. There’s no better way to get to know your competition, your customers, and your business. But whether you begin your career at the entry level or as a supervisor, your job is not to do the work, but to help others do theirs. Management is getting work done through others. Pat Carrigan, a former elementary school principal who became a manager at a General Motors’ car parts plant, says, “I’ve never made a part in my life, and I don’t really have any plans to make one. That’s not my job. My job is to create an environment where people who do make them can make them right, can make them right the first time, can make them at a competitive cost, and can do so with some sense of responsibility and pride in
Chapter 1: Management
what they’re doing. I don’t have to know how to make a part to do any of those things.”6 Pat Carrigan’s description of managerial responsibilities indicates that managers also have to be concerned with efficiency and effectiveness in the work process. Efficiency is getting work done with a minimum of effort, expense, or waste. For example, United Parcel Service, which delivers over 3.5 billion packages a year, will save 14 million gallons of fuel annually when it fully implements its new PAL software. PAL, which stands for Pre-Load Assistance Label, is part of an overall computerized route and load planning system that shows truck loaders where to put packages on the delivery truck (to maximize the number of packages per truck), predetermines how many packages and stops a UPS driver has and what routes should be taken (to minimize travel time, distances, and fuel costs), and tells UPS drivers exactly where your package is on the truck when they stop in front of your house (to minimize search time at each stop).7 By itself, efficiency is not enough to ensure success. Managers must also strive for effectiveness, which is accomplishing tasks that help fulfill organizational objectives, such as customer service and satisfaction. For instance, if you’ve ever walked into one of Home Depot’s, warehouse-sized hardware stores, you may have had trouble getting someone to help you. Home Depot customer Rebecca Gorman complained, “It’s crowded, and the lines are always long. The prices are a little lower, but you just can’t find help.”8 To solve this problem, Home Depot started a program called Service Performance Improvement (SPI) that makes more employees available by preventing them from running forklifts and stocking shelves between 8 A.M. and 8 P.M. Store manager Steve Moody takes this one step further by encouraging his Home Depot employees to wait in the “neutral zone” at the front of the store (between the cash registers and the store shelves) and to be aggressive in asking customers if they need help. The goal is to encourage orange-clad Home Depot employees to be efficient (by restocking shelves) and effective (by first helping customers).9
Review 1: Management Is . . . Good management is working through others to accomplish tasks that help fulfill organizational objectives as efficiently as possible. 2
MANAGEMENT FUNCTIONS
Henri Fayol, who was a managing director (CEO) of a large steel company, was one of the founders of the field of management. You’ll learn more about Fayol and management’s other key contributors when you read about the history of management in Chapter 2. Based on his 20 years of experience as a CEO, Fayol argued that “the success of an enterprise generally depends much more on the administrative ability of its leaders than on their technical ability.”10 In other words, Dell, Inc., the world’s largest personal computer maker, succeeds because of founder and chairman Michael Dell’s capabilities as a manager and not because of his abilities to design Dell PCs or printers. According to Fayol, to be successful, managers need to perform five managerial functions: planning, organizing, coordinating, commanding, and controlling.11 Today, though, most management textbooks have dropped the coordinating function and refer to Fayol’s commanding function as “leading.” Consequently, Fayol’s management functions are known today as planning, organizing, leading, and controlling. Studies indicate that managers who perform these management functions well are better managers. For example, the more time that CEOs spend planning, the more profitable their companies are.12 Over a 25-year period, AT&T found that employees with better planning and decision-making skills were more likely to be promoted into management jobs, to be successful as managers, and to be promoted into upper levels of management.13
5
efficiency Getting work done with a minimum of effort, expense, or waste.
effectiveness Accomplishing tasks that help fulfill organizational objectives.
6
Part 1: Introduction to Management
Part 1: Introduction to Management Chapter 1: Management Chapter 2: The History of Management Chapter 3: Organizational Environments and Cultures Chapter 4: Ethics and Social Responsibility
Part 2: Planning Chapter 5: Planning and Decision Making Chapter 6: Organizational Strategy Chapter 7: Innovation and Change Chapter 8: Global Management
Part 3: Organizing Chapter 9: Designing Adaptive Organizations Chapter 10: Managing Teams Chapter 11: Managing Human Resource Systems Chapter 12: Managing Individuals and a Diverse Work Force
Part 4: Leading Chapter 13: Motivation Chapter 14: Leadership Chapter 15: Managing Communication
The evidence is clear. Managers serve their companies well when they plan, organize, lead, and control. Consequently, as shown in Exhibit 1.1, this textbook is organized based on the functions of management. Furthermore, throughout this text, the major sections within each chapter are numbered using a single digit: 1, 2, 3, and so on. The subsections are consecutively numbered, beginning with the major section number. For example, “2.1” indicates the first subsection under the second major section. This numbering system should help you easily see the relationships among topics and follow the topic sequence. It will also help your instructor refer to specific topics during class discussion. Now let’s take a closer look at each of the management functions: 2.1 planning, 2.2 organizing, 2.3 leading, and 2.4 controlling.
2.1 Planning Planning is determining organizational goals
and a means for achieving them. As you’ll learn in Chapter 5, planning is one of the best ways to improve performance. It encourages people to work harder, to work hard for extended periods, to engage in behaviors Part 5: Controlling directly related to goal accomplishment, and Chapter 16: Control to think of better ways to do their jobs. But Chapter 17: Managing Information most importantly, companies that plan have Chapter 18: Managing Service and Manufacturing Operations larger profits and faster growth than companies that don’t plan. For example, the question, “What busiExhibit 1.1 ness are we in?” is at the heart of strategic planning, which you’ll learn about in Chapter 6. If you can answer the question, “What business are you in?” in Management Functions and Organization of the Textbook two sentences or less, chances are you have a very clear plans for your business. Here’s how Google Fellow (i.e., research scientist) Urs Holzel answered this planning question. “We still have only one product. That’s search. People come to Determining organizational goals and a Google to search the Web, and the main purpose of the page is to make sure means for achieving them. that you’re not distracted from that search. We don’t show people things that they aren’t interested in, because in the long term, that will kill your business.”14 This focus on search is why Google’s home page contains 37 words and no more. Says Holzel, “We count bytes. We count them because our users have modems, so it costs them [time] to download our pages.”15 And the faster the home page loads, and the faster searches are conducted and returned, the more likely customers are to use Google again. Just as importantly, Google has stuck to its vision of being in the search business and nothing else. The Wall Street Journal put it this way: “Since its founding in 1998, the start-up was best meta-analysis defined by what it didn’t do: It didn’t go public prematurely, didn’t raise or spend too much venture funding, and didn’t initiate 23 businesses at once. In A study of studies, a statistical approach that provides one of the best short, it didn’t participate in the cesspool of greed and excess that the rest of scientific estimates of how well manSilicon Valley dove into with abandon.”16 agement theories and practices work. You’ll learn more about planning in Chapter 5 on planning and decision (See the “What Really Works” box making, Chapter 6 on organizational strategy, Chapter 7 on innovation and on the next page for more about change, and Chapter 8 on global management. meta-analysis.)
W H A T
R E A L L Y
W O R K S
Meta-Analysis Some studies show that having two drinks a day increases life expectancy by decreasing your chances of having a heart attack. Yet other studies show that having two drinks a day shortens life expectancy. For years, we’ve “buttered” our morning toast with margarine instead of butter because it was supposed to be better for our health. Now, however, new studies show that the trans-fatty acids in margarine may be just as bad for our arteries as butter. Confusing scientific results like these frustrate ordinary people who want to “eat right” and “live right.” They also make many people question just how useful most scientific research really is. Managers also have trouble figuring out what works, based on the scientific research published in journals like the Academy of Management Journal, the Academy of Management Review, the Strategic Management Journal, the Journal of Applied Psychology, and Administrative Science Quarterly. The Wall Street Journal may quote a management research article from one of these journals that says that total quality management is the best thing since sliced bread (without butter or margarine). Then, just six months later, The Wall Street Journal will quote a different article from the same journal that says that total quality management doesn’t work. If management professors and researchers have trouble deciding what works and what doesn’t, how can practicing managers know? Thankfully, a research tool called meta-analysis, which is a study of studies, is helping management scholars understand how well their research supports management theories. Meta-analysis is also useful for practicing managers because it shows what works and the conditions under which management techniques may work better or worse in the “real world.” Metaanalysis is based on the simple idea that if one study shows that a management technique doesn’t work and another study shows that it does, an average of those results is probably the best estimate of how well that management practice works (or doesn’t work). For example, medical researchers Richard Peto and Rory Collins averaged all of the different results from several hundred studies investigating the relationship between aspirin and heart attacks. Their analysis, based on more than 120,000 patients from numerous studies, showed that aspirin lowered the incidence of heart attacks by an average of 4 percent. Prior to this study, doctors prescribed aspirin as a preventive measure for only 38 percent of heart attack victims. Today, because of the meta-analysis results, doctors prescribe aspirin for 72 percent of heart attack victims. Fortunately, you don’t need a Ph.D. to understand the statistics reported in a meta-analysis. In fact, one primary advantage of meta-analysis over traditional significance
tests is that you can convert meta-analysis statistics into intuitive numbers that anyone can easily understand. Each meta-analysis reported in the “What Really Works” sections of this textbook is accompanied by an easy-to-understand statistic called the probability of success. As its name suggests, the probability of success shows how often a management technique will work. For example, meta-analyses suggest that the best predictor of a job applicant’s on-the-job performance is a test of general mental ability. In other words, smarter people tend to be better workers. The average correlation (one of those often-misunderstood statistics) between scores on general mental ability tests and job performance is .60. However, very few people understand what a correlation of .60 means. What most managers want to know is how often they will hire the right person if they choose job applicants based on general mental ability test scores. Likewise, they want to know how much difference a cognitive ability test makes when hiring new workers. The probability of success may be high, but if the difference isn’t really that large, is it worth a manager’s time to have job applicants take a general mental ability test? Well, our user-friendly statistics indicate that it’s wise to have job applicants take a general mental ability test. In fact, the probability of success, shown in graphical form below, is 76 percent. This means that an employee hired on the basis of a good score on a general mental ability test stands a 76 percent chance of being a better performer than someone picked at random from the pool of all job applicants. So, chances are, you’re going to be right much more often than wrong if you use a general mental ability test to make hiring decisions.17 General Mental Ability 10%
20%
30%
40%
50%
probability of success
60%
70%
80%
90%
100%
76%
In summary, each “What Really Works” section in this textbook is based on meta-analysis research, which provides the best scientific evidence that management professors and researchers have about what works and what doesn’t work in management. We will use the easy-to-understand index known as the probability of success to indicate how well a management idea or strategy is likely to work in the workplace. Of course, no idea or technique works every time and in every circumstance. Nevertheless, the management ideas and strategies discussed in the “What Really Works” sections can usually make a meaningful difference where you work. In today’s competitive, fastchanging, global marketplace, few managers can afford to overlook proven management strategies like the ones discussed in “What Really Works.”
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Part 1: Introduction to Management
2.2 Organizing organizing Deciding where decisions will be made, who will do what jobs and tasks, and who will work for whom.
Organizing is deciding where decisions will be made, who will do what jobs and tasks, and who will work for whom in the company. Sometimes, organizing even means splitting an existing company into separate parts. For example, Palm, Inc. was the maker of the ubiquitous Palm Pilot handheld computer which used Palm’s reliable operating software to run and develop more than 20,000 software programs. However, companies that made competing electronic devices, such as handheld PCs and smart phones that combine an electronic planner with a cell phone, were reluctant to purchase software from Palm, one of their key competitors in the handheld market. Reorganizing Palm, Inc. into two separate companies solved that problem. As shown in Exhibit 1.2, competing makers of electronic devices can now purchase Palm software and development applications from PalmSource, which is a separate company, without benefiting PalmOne, which makes handheld devices and smart phones. In short, said David Nagel, PalmSource’s CEO, reorganizing into two companies has allowed us to “optimize our expertises.”18 You’ll learn more about organizing in Chapter 9 on designing organizations, Chapter 10 on managing teams, Chapter 11 on managing human resources, and Chapter 12 on managing individuals and a diverse work force.
2.3 Leading
For Anne Mulcahy, CEO of Xerox, the key to successful leadership is communicating with the company’s most important constituents: employees and customers.
Our third management function, leading, involves inspiring and motivating workers to work hard to achieve organizational goals. When Anne Mulcahy became Xerox’s CEO, the company was on the brink of bankruptcy—it was $17.1 billion in debt and had only $154 million in cash. In addition, three years of steeply declining revenues and increasing losses had dropped the company’s stock price from $64 a share to just $4.43. Mulcahy admits that the responsibility of turning the company around frightened her: “Nothing spooked me as much as waking up in the middle of the night and thinking about 96,000 people and retirees and what would happen if this thing went south.”19 Still, she took the job. Mulcahy, who traveled to two and sometimes three cities a day to talk to Xerox managers and employees, implored them to “save each dollar as if it were your own.” And at each stop, she reminded them, “Remember, by my calculations, there are [she fills in the number] selling days left in the quarter.”20 Mulcahy said, “One of the things I care most about at Xerox is the morale and motivation at the company. I think it is absolutely critical to being able to deliver results. People have to feel engaged, motivated and feel they are making a contribution to something that is important. I spend the vast majority of my time with customers and employees, and there is nothing more important for any of us to do as leaders than communicate and engage with our two most important constituencies.”21 Today, as a result of Mulcahy’s leadership and the hard work of dedicated Xerox employees, Xerox is back on its feet, having returned to profitability and financial stability.22 You’ll learn more about leading in Chapter 13 on motivation, Chapter 14 on leadership, and Chapter 15 on managing communication. COURTESY OF XEROX CORPORATION
leading Inspring and motivating workers to work hard to achieve organizational goals.
2.4 Controlling The last function of management, controlling, is monitoring progress toward goal achievement and
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Exhibit 1.2 Reorganizing Palm, Inc into PalmSource and Palm One
Source: Palm, Inc. home page, http://www.palm.com/us, 2 January 2005.
then taking corrective action when progress isn’t being made. The basic control process involves setting standards to achieve goals, comparing actual performance to those standards, and then making changes to return performance to those standards. Needing to cut costs (the standard) to restore profitability (the goal), Continental Airlines started giving passengers small cups of their soft drinks instead of an entire can (one corrective action, among many). Company spokesperson Rahsaan Johnson defended the move, saying, “Flight attendants have been telling us that the trash bags they carry were so heavy because of all the [wasted] liquid. We were pouring almost half away.”23 Although Continental will still give entire soft drink cans to customers who request them, serving smaller drinks saves the company $100,000 a year in costs. You’ll learn more about the control function in Chapter 16 on control, Chapter 17 on managing information, and Chapter 18 on managing service and manufacturing operations.
Review 2: Management Functions Henri Fayol’s classic management functions are known today as planning, organizing, leading, and controlling. Planning is determining organizational goals and a means for achieving them. Organizing is deciding where decisions will be made, who will do what jobs and tasks, and who will work for whom. Leading is inspiring and motivating workers to work hard to achieve organizational goals. Controlling is monitoring progress toward goal achievement and taking corrective action when needed. Studies show that performing the management functions well leads to better managerial performance.
What Do Managers Do? Not all managerial jobs are the same. The demands and requirements placed on the CEO of Sony are significantly different from those placed on the manager of your local Wendy’s restaurant. 3 4
After reading the next two sections, you should be able to describe different kinds of managers. explain the major roles and subroles that managers perform in their jobs.
controlling Monitoring progress toward goal achievement and taking corrective action when needed.
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Exhibit 1.3 Jobs and Responsibilities of Four Kinds of Managers
Top Managers nt
tm e
mi
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A
Managers
JO BS
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A Team Le
Team Leade rs
ader ntact A Group F acilitator A Team Co
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First-Line
A Office M anager A Shift Sup ervisor A Departm ent Manag e
agers
ce e n ur s o nc tio e s re ctiv tion ma ta A bje na for en on si o rdi per lem vi r p A oo it e c un im up s b y A u r s teg ke or A tra lw g s ria inin A e ag tra an nd nm g a no hin ng ps hi A ac uli s s n te d n tio hip A che o s i la n s at e A lit al r atio i c l fa rn re A xte al e rn A nte i A
TI
Middle Man
anager A Plant Manag er A Regional M anager A Divisional M anager
DU
A General M
D AN
dent
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A CIO A Vice Presi
IT
ge nt e c itm m A m t co re en A tu m l cu ron A vi en A s n ha
A CFO
A Cor porate
L BI SI ON SP RE
A CEO A COO
KINDS OF MANAGERS
As shown in Exhibit 1.3, there are four kinds of managers, each with different jobs and responsibilities: 3.1 top managers, 3.2 middle managers, 3.3 first-line managers, and 3.4 team leaders.
3.1 Top Managers top managers Executives responsible for the overall direction of the organization.
Top managers hold positions like chief executive officer (CEO), chief operating officer (COO), chief financial officer (CFO), and chief information officer (CIO), and are responsible for the overall direction of the organization. Top managers have the following responsibilities.24 First, they are responsible for creating a context for change. In fact, the CEOs of Kmart, Vivendi, Lucent, Xerox, AT&T, Polaroid, and MCI were all fired within a year’s time precisely because they had not moved fast enough to bring about significant changes in their companies. Indeed, in both Europe and the United States, nearly one-third of all CEOs are eventually fired because of their inability to successfully change their companies.25 Creating a context for change includes forming a long-range vision or mission for the company. As one CEO said, “The CEO has to think about the future more than anyone.” Second, much more than used to be the case, top managers are responsible for developing employees’ commitment to and ownership of the company’s performance. For example, after losing billions of dollars following the
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HE R IGHT T G T H I IN NG DO
September 11 terrorist attacks, United, U.S. Airways, Delta, and American Airlines laid off 31, 27, 23, and 21 percent of their workers, respectively.26 By contrast, because of Southwest TELL AND SHOW PEOPLE THAT ETHICS MATTER Airlines’ commitment to its work force, not one employee was Because managers set the standard for laid off. Said Southwest’s CEO, “We were willing to suffer others in the workplace, unethical behavior some damage, even to our stock price, to protect the jobs of and practices quickly spread when they don’t our people.”27 Employees repaid that commitment with thoudo the right thing. One of the most important sands of cost-saving ideas and increased productivity that made things managers can do is to tell people that Southwest the only profitable airline following September 11. ethics matter. When Charles Holliday, Jr., Third, top managers are responsible for creating a positive CEO of Du Pont, was a young manager, he organizational culture through language and action. Top manwas told by Du Pont's then CEO Dick Heckagers impart company values, strategies, and lessons through ert, “This company lives by the letter of its what they do and say to others, both inside and outside the contracts and the intent of those contracts.” company. One CEO said, “I write memos to the board and our Said Holliday, “I still remember the expression on his face when he said those words, operating committee. I’m sure they get the impression I dash and I've lived by that philosophy ever since.” them off, but usually they’ve been drafted ten or twenty times. In today's business world, however, with The bigger you get, the more your ability to communicate one-third of workers reporting that they've becomes important. So what I write, I write very carefully. I seen their bosses lie, steal from the com28 labor over it.” Above all, no matter what they communicate, pany, or break the law, talk clearly isn't it’s critical for CEOs to send and reinforce clear, consistent enough. Holliday says, “Just saying you're 29 messages. A former Fortune 500 CEO said, “I tried to [use] ethical isn't very useful. You have to earn exactly the same words every time so that I didn’t produce a trust by what you do every day.” So, tell the lot of, ‘Last time you said this, this time you said that.’ You’ve people whom you manage that ethics matter. got to say the same thing over and over and over.”30 Then show them by doing the right thing Finally, top managers are responsible for monitoring their yourself.31 business environments. This means that top managers must closely monitor customer needs, competitors’ moves, and long-term business, economic, and social trends. Rick Wagoner, president and CEO of General Motors, reads six daily newspapers, monitors his Internet connections and news sources all day, and skims a variety of magazines from all over the world. Says Wagoner, “You’ve gotta know what the hell is going on in your business. If you’ve got a problem in China, you’ve gotta get into it and make sure that it’s getting fixed. You’ve got to be on top of your business enough to know where are the problems, where are the opportunities.”32
3.2 Middle Managers Middle managers hold positions like plant manager, regional manager, or divisional
middle managers
manager. They are responsible for setting objectives consistent with top management’s goals and for planning and implementing subunit strategies for achieving those objectives.33 One specific middle management responsibility is to plan and allocate resources to meet objectives. Another major responsibility is to coordinate and link groups, departments, and divisions within a company. At media giant Time Warner, middle managers from each division—Internet (America Online), books, magazines (Time, People, Fortune), cable TV, and entertainment (HBO, Cinemax, Turner Broadcasting, and Warner Brothers Movies and TV)— hold regular bimonthly meetings to discuss shared opportunities in promotion, ad sales, marketing, product licensing, and merchandising.34 These managers worked together to make sure that the Harry Potter and Lord of the Rings movies, produced by Warner Brothers, were featured on America Online, written about in Time and People magazines, promoted on “The WB” (the Warner Brothers TV network), developed into video games, and then locked into exclusive postrelease viewing on cable TV for HBO and Cinemax.35 A third responsibility of middle management is to monitor and manage the performance of the subunits and individual managers who report to them. Jeremy Simon is director of engineering at Remington Associates, a small
Managers responsible for setting objectives consistent with top management's goals and for planning and implementing subunit strategies for achieving these objectives.
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business that provides computer security services to other companies. Simon realized that productivity, which he measures by the percentage of available work hours each week that can be directly billed to clients (the higher that percentage, the better), was dropping. Each of his engineers wasted one-half day per week copying work orders, hand writing time sheets, and compiling the invoices needed to bill clients for their work. So Simon found new software that automatically completes those tasks for them. Now, each engineer has an extra four hours per week to complete billable work for clients. Clients are happier because their work gets done faster, and Simon is happier because his engineers’ billable hours have increased from 70 percent to 82 percent per week.36 Finally, middle managers are also responsible for implementing the changes or strategies generated by top managers. Wal-Mart’s strategy reflects its advertising slogan, “always the low price.” When Wal-Mart began selling groceries in its new 200,000-square-foot supercenters, it made purchasing manager Brian Wilson responsible for buying perishable goods more cheaply than Wal-Mart’s competitors. When small produce suppliers had trouble meeting Wal-Mart’s needs, Wilson worked closely with them and connected them to RetailLink, Wal-Mart’s computer network, “which allows our suppliers immediate access to all information needed to help run the business.” Over time, these steps helped the produce suppliers lower costs and deliver the enormous quantities of fresh fruits and vegetables that Wal-Mart’s supercenters need.37 They also helped Wal-Mart become the world’s largest grocer.38
3.3 First-Line Managers first-line managers Managers who train and supervise the performance of nonmanagerial employees who are directly responsible for producing the company's products or services.
First-line managers hold positions like office manager, shift supervisor, or department manager. The primary responsibility of first-line managers is to manage the performance of entry-level employees, who are directly responsible for producing a company’s goods and services. Thus, first-line managers are the only managers who don’t supervise other managers. First-line managers have the following responsibilities. First-line managers encourage, monitor, and reward the performance of their workers. For example, Jeff Dexheimer requires the waiters and waitresses he supervises at the upscale Melting Pot restaurant in St. Louis to memorize a complex menu and a 400-item wine list. Says Dexheimer, “They’ve got to know every liquor, every beer, every food item, as well as the sauces it comes with.” To reduce turnover and keep his 65 employees motivated, Dexheimer gives out $25 nightly rewards for “best attitude” or for selling the most wine. Since his employees are young and mostly single, he makes sure they work only one night each weekend. And, once a week, after the restaurant closes, he takes his entire staff out for drinks. Says Dexheimer, as a manager, “I don’t make myself successful. My employees make me successful.”39 First-line managers teach entry-level employees how to do their jobs. Because working as a telemarketing representative can be a high-stress, thankless job, most workers quit after three or four months. In fact, any stay over three months is considered long-term employment. With such high employee turnover, supervisors at DialAmerica Marketing, a large telemarketing firm, are constantly training new employees. Before new employees begin their jobs, supervisors run them through intense role-plays with “angry customers.” Supervisors also listen in on new representatives’ phone calls to observe their performance so that the supervisor can correct their mistakes and teach them how to make sales. Finally, during the new reps’ first six weeks on the job, DialAmerica supervisors hold weekly “How’s it going?” sessions where the employees can ask questions or vent their frustrations.40 First-line managers also make detailed schedules and operating plans based on middle management’s intermediate-range plans. In fact, in contrast to the long-term plans of top managers (three to five years out) and the intermediate
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plans of middle managers (6 to 18 months out), first-line managers engage in plans and actions that typically produce results within two weeks.41 For example, consider the typical convenience store manager (e.g., 7-Eleven) who starts the day by driving by competitors’ stores to inspect their gasoline prices and then checks the outside of his or her store for anything that might need maintenance, such as burned-out lights or signs, or restocking, like windshield washer fluid and paper towels. Then comes an inside check, where the manager determines what needs to be done for that day (Will there be enough coffee and donuts for breakfast or enough sandwiches for lunch?). Once today is planned, the manager turns to weekend orders. After accounting for the weather (hot or cold) and the sales trends at the same time last year, the manager makes sure the store will have enough beer, soft drinks, and Sunday papers on hand. Finally, the manager looks 7 to 10 days ahead for hiring needs. Because of strict hiring procedures (basic math tests, drug tests, and background checks), it can take that long to hire new employees. Said one convenience store manager, “I have to continually interview, even if I am fully staffed.”42
3.4 Team Leaders The fourth kind of manager is a team leader. This relatively new kind of management job developed as companies shifted to self-managing teams, which, by definition, have no formal supervisor. In traditional management hierarchies, first-line managers are responsible for the performance of nonmanagerial employees and have the authority to hire and fire workers, make job assignments, and control resources. Team leaders play a very different role because in this new structure, teams now perform nearly all of the functions performed by first-line managers under traditional hierarchies.43 Instead of directing individuals’ work, team leaders facilitate team activities toward goal accomplishment. For example, Hewlett-Packard’s ad for a team leader position says, “Job seeker must enjoy coaching, working with people, and bringing about improvement through hands-off guidance and leadership.”44 Team leaders who fail to understand this key difference often struggle in their roles. A team leader at Texas Instruments said, “I didn’t buy into teams, partly because there was no clear plan on what I was supposed to do. . . . I never let the operators [team members] do any scheduling or any ordering of parts because that was mine. I figured as long as I had that, I had a job.”45 Team leaders fulfill the following responsibilities.46 First, team leaders are responsible for facilitating team performance. This doesn’t mean team leaders are responsible for team performance. They aren’t. The team is. Team leaders help their team members plan and schedule work, learn to solve problems, and work effectively with each other. Management consultant Franklin Jonath says, “The idea is for the team leader to be at the service of the group. It should be clear that the team members own the outcome. The leader is there to bring intellectual, emotional, and spiritual resources to the team. Through his or her actions, the leader should be able to show the others how to think about the work that they’re doing in the context of their lives. It’s a tall order, but the best teams have such leaders.”47 Second, team leaders are responsible for managing external relationships. Team leaders act as the bridge or liaison between their teams and other teams, departments, and divisions in a company. For example, if a member of Team A complains about the quality of Team B’s work, Team A’s leader is responsible for solving the problem by initiating a meeting with Team B’s leader. Together, these team leaders are responsible for getting members of both teams to work together to solve the problem. If it’s done right, the problem is solved without involving company management or blaming members of the other team.48 Third, team leaders are responsible for internal team relationships. Getting along with others is much more important in team structures because team
team leaders Managers responsible for facilitating team activities toward goal accomplishment.
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members can’t get work done without the help of their teammates. Jeanie Duck of the Boston Consulting Group says, “Too often, what happens is that teams get right down to work, and then some sort of conflict arises. It gets ugly and personal very fast, because everyone has been blindsided and no one knows what to do.”49 Because the entire team suffers when conflicts arise, it is critical for team leaders to know how to help team members resolve conflicts. For example, at XEL Communications, the team leader takes the fighting team members to a conference room and attempts to mediate the disagreement by hearing each side and encouraging the team members to agree to a practical solution.50 In extreme cases at Hewlett-Packard, team leaders can dissolve the team and reassign all members to different teams.51 Such instances are rare, however. You will learn more about teams in Chapter 10.
Review 3: Kinds of Managers There are four different kinds of managers. Top managers are responsible for creating a context for change, developing attitudes of commitment and ownership, creating a positive organizational culture through words and actions, and monitoring their company’s business environments. Middle managers are responsible for planning and allocating resources, coordinating and linking groups and departments, monitoring and managing the performance of subunits and managers, and implementing the changes or strategies generated by top managers. First-line managers are responsible for managing the performance of nonmanagerial employees, teaching direct reports how to do their jobs, and making detailed schedules and operating plans based on middle management’s intermediate-range plans. Team leaders are responsible for facilitating team performance, managing external relationships, and facilitating internal team relationships. 4
MANAGERIAL ROLES
So far, we have described managerial work by focusing on the functions of management and by examining the four kinds of managerial jobs. Although those are valid and accurate ways of categorizing managerial work, if you followed managers around as they perform their jobs, Interpersonal Roles you probably would not use the terms planning, organizing, Figurehead leading, and controlling to describe what they do. Leader In fact, that’s exactly the conclusion that management reLiaison searcher Henry Mintzberg came to when he followed around five American CEOs. Mintzberg spent a week “shadowing” each of the CEOs and analyzing their mail, whom they talked to, and what they did. Mintzberg concluded that managers fulfill three major roles while performing their jobs:52 Informational Roles Exhibit 1.4
Mintzberg’s Managerial Roles and Subroles
Monitor Disseminator Spokesperson
Decisional Roles Entrepreneur Disturbance Handler Resource Allocator Negotiator Source: Reprinted by permission of Harvard Business Review (an Exhibit) from “The Manager’s Job: Folklore and Fact.” By Mintzberg, H., Harvard Business Review, July–August 1975. Copyright © by the President and Fellows of Harvard College. All rights reserved.
• interpersonal roles • informational roles • decisional roles In other words, managers talk to people, gather and give information, and make decisions. Furthermore, as shown in Exhibit 1.4, these three major roles can be subdivided into 10 subroles. Let’s examine each major role—4.1 interpersonal, 4.2 informational, and 4.3 decisional roles—and their 10 subroles.
4.1 Interpersonal Roles More than anything else, management jobs are people-intensive. Estimates vary with the level of management, but most managers spend between two-thirds and four-fifths of their time in face-to-face communication with others.53 If you’re a loner, or
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©BLOOMBERG NEWS/LANDOV
if you consider dealing with people a “pain,” then you may not be cut out for management work. In fulfilling the interpersonal role of management, managers perform three subroles: figurehead, leader, and liaison. In the figurehead role, managers perform ceremonial duties like greeting company visitors, speaking at the opening of a new facility, or representing the company at a community luncheon to support local charities. For example, when Japanese-based Kikkoman Corporation, the world’s largest soy sauce maker, opened its first soy sauce manufacturing plant in Europe (in Hoogezand Sappemeer, the Netherlands), its CEO, Yuzaburo Mogi, gave a speech pledging that Kikkoman would be a good corporate citizen by donating to a local environmental conservation and water quality project and to the Rembrandt House Art Gallery.54 In the leader role, managers motivate and encourage workers to accomplish organizational objectives. At CDW (Computer Discount Warehouse), new CEO John Edwardson promised CDW’s 2,750 workers that he would shave his head if the company met its third quarter goals. Despite the industry downturn in computer sales, company employees responded. After announcing at a company function that the third quarter goals had been met, Edwardson, as promised, had his head shaved to the harmonic sounds of a barbershop quartet.55 At J.M. Smucker, that’s right, the jelly and jam company, managers regularly thank employees with celebratory lunches and gift certificates. Tonie Williams, director of marketing for peanut butter, says “she’s been thanked more in her two years at Smucker than she was in her nine years at Nestlé, Kraft, and Procter & Gamble combined.”56 Fortune magazine included both CDW and Smucker in its list of the top 100 places to work in the United States.57 In the liaison role, managers deal with people outside their units. Studies consistently indicate that managers spend as much time with “outsiders” as they do with their own subordinates and their own bosses. In addition to his normal duties, Rajesh Hukku, chairman of j-Flex Solutions, a maker of financialservices software, regularly goes on sales calls, helps close sales deals, and markets his product to potential customers at industry conventions and forums.58 The same holds true for the convenience store managers discussed above. From dealing with vendors who make store deliveries and set up product displays, to working with computer technicians who help with computer glitches and satellite connections to headquarters, to ordering from sales representatives who supply the mops and deli aprons used in the store, to calling the sheriff about stolen credit cards, even first-line managers spend much of their time dealing with outsiders.59
4.2 Informational Roles Not only do managers spend most of their time in face-to-face contact with others, but they spend time obtaining and sharing information. Indeed, Mintzberg found that the managers in his study spent 40 percent of their time giving and getting information from others. In this regard, management can be viewed as processing information, gathering information by scanning the business environment and listening to others in face-to-face conversations, and then sharing that information with people inside and outside the company. Mintzberg described three informational subroles: monitor, disseminator, and spokesperson.
J.M. Smucker Company has been on Fortune’s list of 100 Best Companies to Work For since the list was started in 1998. Only 22 other companies share this honor. Tim and Richard Smucker, company chairman and president, are pictured here ringing the opening bell of the New York Stock Exchange after their company acquired Jif and Crisco from Procter & Gamble.
figurehead role The interpersonal role managers play when they perform ceremonial duties.
leader role The interpersonal role managers play when they motivate and encourage workers to accomplish organizational objectives.
liaison role The interpersonal role managers play when they deal with people outside their units.
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monitor role The informational role managers play when they scan their environment for information.
disseminator role The informational role managers play when they share information with others in their departments or companies.
spokesperson role The informational role managers play when they share information with people outside their departments or companies.
In the monitor role, managers scan their environment for information, actively contact others for information, and, because of their personal contacts, receive a great deal of unsolicited information. Besides receiving firsthand information, managers monitor their environment by reading local newspapers and The Wall Street Journal to keep track of customers, competitors, and technological changes that may affect their businesses. Now, managers can also take advantage of electronic monitoring and distribution services that track the news wires (Associated Press, Reuters, etc.) for stories related to their businesses. These services deliver customized electronic newspapers that include only stories on topics the managers specify. Business Wire (http://www.businesswire.com) offers services such as IndustryTrak, which monitors and distributes daily news headlines from major industries (e.g., automotive, banking and financial, health, high tech).60 CyberAlert (http://www.cyberalert.com) keeps round-the-clock track of new stories in categories chosen by each subscriber.61 FNS NewsClips Online (http://www.news-clips.com) provides subscribers daily electronic news clips from more than 5,000 online news sites.62 Because of their numerous personal contacts and their access to subordinates, managers are often hubs for the distribution of critical information. In the disseminator role, managers share the information they have collected with their subordinates and others in the company. Although there will never be a complete substitute for face-to-face dissemination of information, the primary methods of communication in large companies like Continental Airlines and Cisco Systems are email and voice mail. At Continental Airlines, the CEO broadcasts a voice mail message to all employees every Friday.63 John Chambers, Cisco’s CEO, says that 90 percent of his communication with employees is through email and voice mail. Says Chambers, “If you don’t have the ability to interface with customers, employees, and suppliers, you can’t manage your business.”64 In contrast to the disseminator role, in which managers distribute information to employees inside the company, in the spokesperson role, managers share information with people outside their departments and companies. One of the most common ways CEOs serve as spokespeople for their companies is at annual meetings with company shareholders or the board of directors. For example, at a Microsoft annual shareholder meeting, CEO Steve Ballmer told investors that Microsoft intended to offer its own Internet search service, http://beta.search.msn.com. Balmer vowed that although Microsoft was late to the search engine business, “We will catch up, and we will surpass” Google and Yahoo in the Internet search and advertising business.65
4.3 Decisional Roles
entrepreneur role The decisional role managers play when they adapt themselves, their subordinates, and their units to incremental change.
According to Mintzberg, the time managers spend obtaining and sharing information is not an end in itself. The time spent talking to and obtaining and sharing information with people inside and outside the company is useful to managers because it helps them make good decisions. According to Mintzberg, managers engage in four decisional subroles: entrepreneur, disturbance handler, resource allocator, and negotiator. In the entrepreneur role, managers adapt themselves, their subordinates, and their units to incremental change. At Bic, a manufacturer of disposable pens, razors, and cigarette lighters, each Friday at 2:15 P.M. workers leave their jobs on the manufacturing line to meet in a conference room. Then, one by one, ideas are pulled from the employee suggestion box, read aloud, discussed, and voted on. Suggestions range from solutions that prevent machines from spraying oil on the floor to emptying the huge company trash bins just once a week—because they weren’t even half full when emptied twice a week. Once an idea is approved, it’s turned over to the appropriate supervisor who
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then has 10 days to implement the idea. Step by step, Bic’s employee ideas improve morale, boost company productivity, and reinforce the idea that change is welcome and expected. Indeed, in one year at one Bic plant, 577 out of 684 hourly employees submitted 2,999 suggestions, of which 2,368 were actually used.66 By contrast, in the disturbance handler role, managers respond to pressures and problems so severe that they demand immediate attention and action. Managers often play the role of disturbance handler when the board of a failing company hires a new CEO, who is charged with turning the company around. Gerald Grinstein became Delta Airlines’ new CEO after the company lost $6 billion in three years. With Delta burning through $4 million in cash per day and facing a real threat of bankruptcy, Grinstein laid off 7,000 workers, closed Delta’s second largest airport hub at Dallas–Fort Worth International Airport where it was losing money, and convinced the pilots’ union to agree to a five-year contract that cut wages by 32.5 percent. These changes put the company halfway to its goal of cutting costs by $5 billion a year, but if Delta is to survive, Grinstein and his management team will have to make even more changes to eliminate another $2.5 billion in annual costs.67 In the resource allocator role, managers decide who will get what resources and how many resources they will get. For instance, in hopes of increasing its stagnant sales and market share, Coca-Cola added an extra $300 million to Coke’s $7.7 billion marketing budget.68 After already cutting its costs by $240 per car, Ford announced that it wanted to cut costs by a total of $700 per car over the next three years. Accordingly, it reassigned another 200 engineers (now 1,200 in total) to achieving that goal.69 Finally, hoping to revive sales of its luxury cars, General Motors invested $4 billion in its Cadillac division, or nearly 10 percent of its total capital budget for a division that accounts for only 4 percent of GM sales.70 In these instances, top managers acted as resource allocators by changing budgets (Coke), reassigning human resources (Ford), or redirecting long-term investment in the company (GM). In the negotiator role, managers negotiate schedules, projects, goals, outcomes, resources, and employee raises. For Michael O’Leary, CEO of Dublinbased Ryanair, Europe’s low-cost airline with fares sometimes as much as 80 percent lower than those of established airlines, negotiation is a key part of his strategy. Ryanair achieves costs 30 percent below average and has 40 percent higher productivity in part because it flies to secondary airports near, but not in, major cities. Because these airports, such as Beauvais just outside Paris, are eager for business, Ryanair can negotiate airport fees as low as $1.50 per passenger, compared to $15 to $22 per passenger at Europe’s major airports, like London’s Heathrow or Paris’s Charles de Gaulle. These lower costs allow Ryanair to break even when its planes are half full; in contrast, major carrier British Airways must fly its planes at 77 percent full to break even.71 And with 30 more secondary airports bidding for its business, Ryanair is in the driver’s seat to keep airport fees—and its costs and prices—low for years to come. Negotiating, as you can see, is a key to success and a basic part of managerial work.
Review 4: Managerial Roles Managers perform interpersonal, informational, and decisional roles in their jobs. In fulfilling the interpersonal role, managers act as figureheads by performing ceremonial duties, as leaders by motivating and encouraging workers, and as liaisons by dealing with people outside their units. In performing their informational role, managers act as monitors by scanning their environment for information, as disseminators by sharing information with others in the company, and as spokespeople by sharing information with people outside their departments or companies. In fulfilling decisional roles, managers act as
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disturbance handler role The decisional role managers play when they respond to severe problems that demand immediate action.
resource allocator role The decisional role managers play when they decide who gets what resources.
negotiator role The decisional role managers play when they negotiate schedules, projects, goals, outcomes, resources, and employee raises.
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entrepreneurs by adapting their units to incremental change, as disturbance handlers by responding to larger problems that demand immediate action, as resource allocators by deciding resource recipients and amounts, and as negotiators by bargaining with others about schedules, projects, goals, outcomes, and resources.
What Does It Take to Be a Manager? I didn’t have the slightest idea what my job was. I walked in giggling and laughing because I had been promoted and had no idea what principles or style to be guided by. After the first day, I felt like I had run into a brick wall. (Sales Representative #1) Suddenly, I found myself saying, boy, I can’t be responsible for getting all that revenue. I don’t have the time. Suddenly you’ve got to go from [taking care of] yourself and say now I’m the manager, and what does a manager do? It takes a while thinking about it for it to really hit you . . . a manager gets things done through other people. That’s a very, very hard transition to make.72 (Sales Representative #2) The above statements were made by two star sales representatives, who, on the basis of their superior performance, were promoted to the position of sales manager. As their comments indicate, at first they did not feel confident about their ability to do their jobs as managers. Like most new managers, these sales managers suddenly realized that the knowledge, skills, and abilities that led to success early in their careers (and were probably responsible for their promotion into the ranks of management) would not necessarily help them succeed as managers. As sales representatives, they were responsible only for managing their own performance. But as sales managers, they were now directly responsible for supervising all of the sales representatives in their sales territories. Furthermore, they were now directly accountable for whether those sales representatives achieved their sales goals. If performance in nonmanagerial jobs doesn’t necessarily prepare you for a managerial job, then what does it take to be a manager? 5 6 7
5
technical skills The ability to apply the specialized procedures, techniques, and knowledge required to get the job done.
After reading the next three sections, you should be able to explain what companies look for in managers. discuss the top mistakes that managers make in their jobs. describe the transition that employees go through when they are promoted to management.
WHAT COMPANIES LOOK FOR IN MANAGERS
Broadly speaking, when companies look for employees who would be good managers, they look for individuals who have technical skills, human skills, conceptual skills, and the motivation to manage.73 Exhibit 1.5 shows the relative importance of these four skills to the jobs of team leaders, first-line managers, middle managers, and top managers. Technical skills are the ability to apply the specialized procedures, techniques, and knowledge required to get the job done. For the sales managers described above, technical skills are the ability to find new sales prospects, develop accurate sales pitches based on customer needs, and close the sale. For a nurse supervisor, technical skills include being able to insert an IV or operate a “crash cart” if a patient goes into cardiac arrest. Technical skills are most important for team leaders and lower-level managers because they supervise the workers who produce products or serve customers.
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Low Importance
High Importance
Team leaders and first-line managers need technical knowledge and skills to train new employees and help employees solve problems. Technical knowledge and skills are also needed to troubleshoot problems that employees can’t handle. Technical skills become less important as managers rise through the managerial ranks, but they are still important. Human skills can be summarized as the ability to work well with others. Managers with people skills work effectively within groups, encourage others to express their thoughts and feelings, are sensitive to others’ needs and viewpoints, and are good listeners and communicators. Human skills are equally important at all levels of manageTechnical Human Conceptual Motivation ment, from first-line supervisors to CEOs. Skills Skills Skills to Manage However, because lower-level managers Top Managers First-Line Managers spend much of their time solving technical problems, upper-level managers may actually Middle Managers Team Leaders spend more time dealing directly with people. On average, firstline managers spend 57 per1.5 cent of their time with people, but that percentage increases to 63 percent for Exhibit Relative Importance of Managerial 74 middle managers and 78 percent for top managers. Skills to Different Managerial Jobs Conceptual skills are the ability to see the organization as whole, to understand how the different parts of the company affect each other, and to recognize how the company fits into or is affected by its external environment, such as the human skills local community, social and economic forces, customers, and the competition. The ability to work well with others. Good managers have to be able to recognize, understand, and reconcile multiple complex problems and perspectives. In other words, managers have to be conceptual skills smart! In fact, intelligence makes so much difference for managerial perform- The ability to see the organization as a ance that managers with above-average intelligence typically outperform whole, understand how the different managers of average intelligence by approximately 48 percent.75 Clearly, parts affect each other, and recognize how the company fits into or is affected companies need to be careful to promote smart workers into management. by its environment. Conceptual skills increase in importance as managers rise through the management hierarchy. Good management involves much more than intelligence, however. For example, making the department genius a manager can be disastrous if that genius lacks technical skills, human skills, or one other factor known as the motivation to manage. Motivation to manage is an assessment of how motivated motivation to manage employees are to interact with superiors, participate in competitive situations, An assessment of how enthusiastic behave assertively toward others, tell others what to do, reward good behavior employees are about managing the work of others. and punish poor behavior, perform actions that are highly visible to others, and handle and organize administrative tasks. Managers typically have a stronger motivation to manage than their subordinates, and managers at higher levels usually have a stronger motivation to manage than managers at lower levels. Furthermore, managers with a stronger motivation to manage are promoted faster, are rated as better managers by their employees, and earn more money than managers with a weak motivation to manage.76
Review 5: What Companies Look for in Managers Companies do not want one-dimensional managers. They want managers with a balance of skills. They want managers who know their stuff (technical skills), are equally comfortable working with blue-collar and white-collar employees (human skills), are able to assess the complexities of today’s competitive marketplace and position their companies for success (conceptual skills), and want to assume
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positions of leadership and power (motivation to manage). Technical skills are most important for lower-level managers, human skills are equally important at all levels of management, and conceptual skills and motivation to manage increase in importance as managers rise through the managerial ranks. 6
MISTAKES MANAGERS MAKE
Another way to understand what it takes to be a manager is to look at the mistakes managers make. In other words, we can learn just as much from what managers shouldn’t do as from what they should do. Exhibit 1.6 lists the top 10 mistakes managers make. Several studies of U.S. and British managers have compared “arrivers,” or managers who made it all the way to the top of their companies, with “derailers,” managers who were successful early in their careers but were knocked off the fast track by the time they reached the middle to upper levels of management.77 The researchers found that there were only a few differences between arrivers and derailers. For the most part, both groups were talented and both groups had weaknesses. But what distinguished derailers from arrivers was that derailers possessed two or more “fatal flaws” with respect to the way that they managed people! Although arrivers were by no means perfect, they usually had no more than one fatal flaw or had found ways to minimize the effects of their flaws on the people with whom they worked. The number one mistake made by derailers was that they were insensitive to others by virtue of their abrasive, intimidating, and bullying management style. The authors of one study described a manager who walked into his subordinate’s office and interrupted a meeting by saying, “I need to see you.” When the subordinate tried to explain that he was not available because he was in the middle of a meeting, the manager barked, “I don’t give a damn. I said I wanted to see you now.”78 Not surprisingly, only 25 percent of derailers were rated by others as being good with people, compared to 75 percent of arrivers. Even the U.S. Army recognizes that insensitivity to others is a serious problem. All officers who have been promoted to the rank of general are sent to the Brigadier General Training Conference, known informally in the Army as the “charm school.” The basic goal of this training is simple: to encourage new generals to get in touch with and lose their “inner jerk.” Lt. Col. Howard Olsen, who runs the training, tells the officers, “Each and every one of you has something that makes you a jerk. Some of you have more than one. I know. I’ve talked to you.”79 The second mistake was that derailers were often cold, aloof, or arrogant. Exhibit 1.6 Top Ten Mistakes That Managers Make Although this sounds like insensitivity to others, it has more to do with derailed managers being so smart, so expert in their areas of knowledge, that they treated others with 1. Insensitive to others: abrasive, intimidating, bullying style. contempt because they weren’t experts, too. For 2. Cold, aloof, arrogant. example, the telecommunications company SBC 3. Betrayal of trust. called in an industrial psychologist to counsel its vice president of human resources because she had 4. Overly ambitious: thinking of next job, playing politics. “been blamed for ruffling too many feathers at the 5. Specific performance problems with the business. company.”80 Interviews with the vice president’s 6. Overmanaging: unable to delegate or build a team. coworkers and subordinates revealed that they 7. Unable to staff effectively. thought she was brilliant, was “smarter and faster than other people,” “generates a lot of ideas,” and 8. Unable to think strategically. “loves to deal with complex issues.” Unfortunately, 9. Unable to adapt to boss with different style. these smarts were accompanied by a cold, aloof, 10. Overdependent on advocate or mentor. and arrogant management style. The people she worked with complained that she does “too Source: M. W. McCall, Jr. & M. M. Lombardo, “What Makes a Top Executive?” Psychology much too fast,” treats coworkers with “disdain,” Today, February 1983, 26–31.
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“impairs teamwork,” “doesn’t always show her warm side,” and has “burned too many bridges.” The third and fourth mistakes made by the derailers, betraying a trust and being overly ambitious, reflect a lack of concern for coworkers and subordinates. Betraying a trust doesn't mean being dishonest. Instead, it means making others look bad by not doing what you said you would do when you said you would do it. That mistake, in itself, is not fatal because managers and their workers aren’t machines. Tasks go undone in every company every single business day. There’s always too much to do and not enough time, people, money, or resources to do it. The fatal betrayal of trust is failing to inform others when things will not be done on time. This failure to admit mistakes, quickly inform others of the mistakes, take responsibility for the mistakes, and then fix them without blaming others clearly distinguished the behavior of derailers from arrivers. The fourth mistake, as mentioned above, was being overly political and ambitious. Managers who always have their eye on their next job rarely establish more than superficial relationships with peers and coworkers. In their haste to gain credit for successes that would be noticed by upper management, they make the fatal mistake of treating people as though they don’t matter. The fatal mistakes of being unable to delegate, build a team, and staff effectively indicate that many derailed managers were unable to make the most basic transition to managerial work: to quit being hands-on doers and get work done through others. Two things go wrong when managers make these mistakes. First, when managers meddle in decisions that their subordinates should be making—when they can’t stop being doers—they alienate the people who work for them. Second, because they are trying to do their subordinates’ jobs in addition to their own, managers who fail to delegate will not have enough time to do much of anything well. Jo DeMars, president of DeMars & Associates, experienced both problems by closely micromanaging every detail at the company she founded. Although this worked when the company was small, it became a source of stress as the company grew. Employee Natalie Fleury said of DeMars, “She’d delegate but she’d still want control.” As a result, her staffers became so reluctant to make their own decisions that they asked DeMars to approve almost everything. Soon, DeMars admits, “I found myself getting so wrapped up in the day-to-day tasks that I couldn’t be strategic. . . . If someone came in with a wrinkled shirt, I’d think, ‘Well, this “business casual” just doesn’t work, and I’ve got to find another solution.’ A lot of it was making mountains of molehills, and when you do that, you suddenly have a mountain range in your life.”81 In the end, employee morale suffered, and DeMars’s health deteriorated from the stress of trying to do too much.
Review 6: Mistakes Managers Make Another way to understand what it takes to be a manager is to look at the top mistakes managers make. Five of the most important mistakes made by managers are being abrasive and intimidating; being cold, aloof, or arrogant; betraying trust; being overly ambitious; and failing to build a team and then delegate to that team. 7
THE TRANSITION TO MANAGEMENT: THE FIRST YEAR
In her book Becoming a Manager: Mastery of a New Identity, Harvard Business School professor Linda Hill followed the development of 19 people in their first year as managers. Her study found that becoming a manager produced a profound psychological transition that changed the way these managers viewed themselves and others. As shown in Exhibit 1.7, the evolution of the managers’ thoughts, expectations, and realities over the course of their first year in management reveals the magnitude of the changes they experienced.
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MANAGERS’ INITIAL EXPECTATIONS JAN
FEB
MAR
AFTER SIX MONTHS AS A MANAGER APR
MAY
JUN
AFTER A YEAR AS A MANAGER JUL
AUG
SEP
OCT
NOV
A Be the boss
A Initial expectations were wrong
A No longer “doer”
A Formal authority
A Fast pace
A Communication, listening, & positive reinforcement
A Manage tasks
A Heavy workload
A Learning to adapt to and control stress
A Job is not managing people
A Job is to be problem-solver and troubleshooter for subordinates
A Job is people development
DEC
Source: L. A. Hill, Becoming a Manager: Mastery of a New Identity (Boston: Harvard Business School Press, 1992).
Exhibit 1.7 The Transition to Management: Initial Expectations, after Six Months, and after a Year
Initially, the managers in Hill’s study believed that their job was to exercise formal authority and to manage tasks—basically being the boss, telling others what to do, making decisions, and getting things done. One manager said, “Being the manager means running my own office, using my ideas and thoughts.” Another said, “It’s [the office] my baby. It’s my job to make sure it works.” In fact, most of the new managers were attracted to management positions because they wanted to be “in charge.” Surprisingly, the new managers did not believe that their job was to manage people. The only aspects of people management mentioned by the new managers were hiring and firing. After six months, most of the new managers had concluded that their initial expectations about managerial work were wrong. Management wasn’t being “the boss.” It wasn’t just about making decisions and telling others what to do. The first surprise was the fast pace and heavy workload involved in being a manager. Said one manager, “This job is much harder than you think. It is 40 to 50 percent more work than being a producer! Who would have ever guessed?” The pace of managerial work was startling, too. Another manager said, “You have eight or nine people looking for your time . . . coming into and out of your office all day long.” A somewhat frustrated manager declared that management was “a job that never ended,” “a job you couldn’t get your hands around.” Informal descriptions like this are consistent with studies indicating that the average first-line manager spends no more than two minutes on a task before being interrupted by a request from a subordinate, a phone call, or an email. The pace is somewhat less hurried for top managers, who spend an average of approximately nine minutes on a task before having to switch to another. In practice, this means that supervisors may perform 30 different tasks per hour, while top managers perform seven different tasks per hour, with each task typically different from the one that preceded it. A manager described this frenetic level of activity by saying, “The only time you are in control is when you shut your door, and then I feel I am not doing the job I’m supposed to be doing, which is being with the people.” The other major surprise after six months on the job was that the managers’ expectations about what they should do as managers were very different from their subordinates’ expectations. Initially, the managers defined their jobs as helping their subordinates perform their jobs well. For the managers, who still defined themselves as doers rather than managers, assisting their subordinates meant going out on sales calls or handling customer complaints. One manager said, “I like going out with the rep, who may need me to lend him my credibility as manager. I like the challenge, the joy in closing. I go out with the reps and we make the call and talk about the customer; it’s fun.” But when the managers “assisted” in this way, their subordinates were resentful and viewed their help as interference. The subordinates wanted their managers to help them by solving problems that they couldn’t solve. Once the managers realized
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CREDIT DIGITAL VISION
this contradiction, they embraced their role as problem-solver and troubleshooter. Thus, they could help without interfering with their subordinates’ jobs. After a year on the job, most of the managers thought of themselves as managers and no longer as doers. In making the transition, they finally realized that people management was the most important part of their jobs. One manager summarized the lesson that had taken him a year to learn by saying, “As many demands as managers have on their time, I think their primary responsibility is people development. Not production, but people development.” Another indication of how much their views had changed was that most of the managers now regretted the rather heavyhanded approach they had used in their early attempts to manage their subordinates. “I wasn’t good at managing..., so I was bossy like a first-grade teacher.” “Now I see that I started out as a drill sergeant. I was inflexible, just a lot of how-to’s.” By the end of the year, most of the managers had abandoned their authoritarian approach for one based on communication, listening, and positive reinforcement. One manager explained, “Last night at five I handed out an award in the board-room just to the individual. It was the first time in his career that he had done [earned] $100,000, and I gave him a piece of glass [a small award] and said I’d heard a rumor that somebody here just crossed over $100,000 and I said congratulations, shook his hand, and walked away. It was not public in the sense that I gathered everybody around. But I knew and he did too.” Finally, after beginning their year as managers in frustration, the managers came to feel comfortable with their subordinates, with the demands of their jobs, and with their emerging managerial styles. While being managers had made them acutely aware of their limitations and their need to develop as people, it also provided them with an unexpected reward of coaching and developing the people who worked for them. One manager said, “It gives me the best feeling to see somebody do something well after I have helped them. I get excited.” Another stated, “I realize now that when I accepted the position of branch manager that it is truly an exciting vocation. It is truly awesome, even at this level; it can be terribly challenging and terribly exciting.”
Review 7: The Transition to Management: The First Year Managers often begin their jobs by using more formal authority and less people management. However, most managers find that being a manager has little to do with “bossing” their subordinates. After six months on the job, the managers were surprised at the fast pace and heavy workload and that “helping” their subordinates was viewed as interference. After a year on the job, most of the managers had come to think of themselves not as doers, but as managers who get things done through others. And, because they finally realized that people management was the most important part of their job, most of them had abandoned their authoritarian approach for one based on communication, listening, and positive reinforcement.
Why Management Matters If you walk down the aisle of the business section in your local bookstore, you’ll find hundreds of books that explain precisely what companies need to do to be successful. Unfortunately, the best-selling business books tend to be faddish,
Employees are an important element of a company’s competitive advantage. Since Fortune first began publishing its list of “100 Best Companies to Work for” in 1998, Starbucks has been on the prestigious list all but one year. By being committed to the well-being and development of its employees, Starbucks has been able to grow exponentially, adding thousands of stores and tens of thousands of new employees, and still remain one of America’s best companies to work for.
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changing dramatically every few years. One thing that hasn’t changed, though, is the importance of good people and good management: Companies can't succeed for long without them.
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After reading this section, you should be able to explain how and why companies can create competitive advantage through people.
COMPETITIVE ADVANTAGE THROUGH PEOPLE
Let’s pretend that you just inherited $5,000. You can’t spend the money, however. The will stipulates that you have to invest the money in the stock market and that you can’t touch the stocks, win or lose, for 20 years. After that time, you can cash in your stocks and do what you want. Should you invest in high-tech companies, companies with little competition, companies that are up and comers, or companies that now dominate their industries? Which five companies would you invest in? Stanford University business professor Jeffrey Pfeffer would tell you to invest in the five best managed companies you could find. In his books, Competitive Advantage through People and The Human Equation: Building Profits by Putting People First, Pfeffer contends that what separates top performing companies from their competitors is the way they treat their work forces—in other words, their management.82 Moreover, if you had invested $1,000 in each of the five best managed companies in Pfeffer’s study 20 years ago, your initial $5,000 investment would be worth a total of $917,990, for a spectacular return on investment of 18,359.80 percent!83 Pfeffer found that managers in these top performing companies used ideas like employment security, selective hiring, self-managed teams and decentralization, high pay contingent on company performance, extensive training, reduced status distinctions (between managers and employees), and extensive sharing of financial information to achieve financial performance that, on average, was 40 percent higher than that of other companies. These ideas, which are explained in detail in Exhibit 1.8, help organizations develop work forces that are smarter, better trained, more motivated, and more committed than their competitors’ work forces. And, as indicated by the phenomenal growth and return on investment earned by these companies, smarter, better trained, and more committed work forces provide superior products and service to customers, who keep buying and, by telling others about their positive experiences, bring in new customers. Pfeffer also argues that companies that invest in their people will create long-lasting competitive advantages that are difficult for other companies to duplicate. Indeed, other studies clearly demonstrate that sound management practices can produce substantial advantages in four critical areas of organizational performance: sales revenues, profits, stock market returns, and customer satisfaction. In terms of sales revenues and profits, a study of nearly 1,000 U.S. firms found that companies that use just some of the ideas shown in Exhibit 1.8 had $27,044 more sales per employee and $3,814 more profit per employee than companies that didn’t.84 For a 100-person company, these differences amount to $2.7 million more in sales and nearly $400,000 more in annual profit! For a 1,000-person company, the difference grows to $27 million more in sales and $4 million more in annual profit! Another study investigating the effect on company sales found that poorly performing companies that adopted management techniques as simple as setting expectations (establishing goals, results, and schedules), coaching (informal, ongoing discussions between managers and subordinates about what is being done well and what could be done better), reviewing (annual,
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1. Employment Security—Employment security is the ultimate form of commitment that companies can make to their workers. Employees can innovate and increase company productivity without fearing the loss of their jobs. 2. Selective Hiring—If employees are the basis for a company’s competitive advantage, and those employees have employment security, then the company needs to aggressively recruit and selectively screen applicants in order to hire the most talented employees available. 3. Self-Managed Teams and Decentralization—Self-managed teams are responsible for their own hiring, purchasing, job assignments, and production. Self-managed teams can often produce enormous increases in productivity through increased employee commitment and creativity. Decentralization allows employees who are closest to (and most knowledgeable about) problems, production, and customers to make timely decisions. Decentralization increases employee satisfaction and commitment. 4. High Wages Contingent on Organizational Performance—High wages are needed to attract and retain talented workers and to indicate that the organization values its workers. Employees, like company founders, shareholders, and managers, need to share in the financial rewards when the company is successful. Why? Because employees who have a financial stake in their companies are more likely to take a long-run view of the business and think like business owners. 5. Training and Skill Development—Like a high-tech company that spends millions of dollars to upgrade computers or research and development labs, a company whose competitive advantage is based on its people must invest in the training and skill development of its people. 6. Reduction of Status Differences—These are fancy words that indicate that the company treats everyone, no matter what the job, as equal. There are no reserved parking spaces. Everyone eats in the same cafeteria and has similar benefits. The result: Much improved communication as employees focus on problems and solutions rather than on how they are less valued than managers. 7. Sharing Information—If employees are to make decisions that are good for the long-run health and success of the company, they need to be given information about costs, finances, productivity, development times, and strategies that was previously known only by company managers. Source: J. Pfeffer, The Human Equation: Building Profits by Putting People First (Boston: Harvard Business School Press, 1996).
formal discussion about results), and rewarding (adjusting salaries and bonuses based on employee performance and results) were able to improve their average return on investment from 5.1 percent to 19.7 percent and increase sales by $94,000 per employee!85 So, in addition to significantly improving the profitability of healthy companies, sound management practices can turn around failing companies. To determine the effect on stock market performance, researchers matched companies on Fortune magazine’s list of “100 Best Companies to Work for in America” (see http://www.fortune.com/fortune/bestcompanies/ and http://www.greatplacetowork.com/best/list-bestusa.htm for more information) with companies that were similar in industry, size, and, this is key, operating performance. In other words, both sets of companies were equally good performers; the key difference was how well they treated their employees. For both sets of companies, the researchers found that employee attitudes such as job satisfaction changed little from year to year. The people who worked for the “100 Best” companies were consistently much more satisfied with their jobs and employers year after year than were employees in the matched companies. More importantly, those stable differences in employee attitudes were strongly related to differences in stock market performance. Over a three-year period, an investment in the “100 Best Companies to Work for” would have resulted in an 82 percent cumulative stock return compared to just 37 percent for the matched companies.86 This difference is remarkable given that both sets of companies were equally good performers at the beginning of the period. Finally, research also indicates that managers have an important effect on customer satisfaction. Many people find this surprising. They don’t understand how managers, who are largely responsible for what goes on inside the company, can affect what goes on outside the company. They wonder how
Exhibit 1.8 Competitive Advantage through People: Management Practices
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managers, who often interact with customers under negative conditions (when customers are angry or dissatisfied), can actually improve customer satisfaction. It turns out that managers influence customer satisfaction through employee satisfaction. When employees are satisfied with their jobs, their bosses, and the companies they work for, they provide much better service to customers.87 In turn, customers are more satisfied, too. You will learn more about the service-profit chain in Chapter 18 on managing service and manufacturing operation.
Review 8: Competitive Advantage through People Why does management matter? Well-managed companies are competitive because their work forces are smarter, better trained, more motivated, and more committed. Furthermore, companies that practice good management consistently have greater sales revenues, profits, and stock market performance than companies that don’t. Finally, good management matters because good management leads to satisfied employees who, in turn, provide better service to customers. Because employees tend to treat customers the same way that their managers treat them, good management can improve customer satisfaction.
Key Terms conceptual skills 19 controlling 9 disseminator role 16 disturbance handler role 17 effectiveness 5 efficiency 5 entrepreneur role 16 figurehead role 15 first-line managers 12
human skills 19 leader role 15 leading 8 liaison role 15 management 4 meta-analysis 6 middle managers 11 monitor role 16 motivation to manage 19
negotiator role 17 organizing 8 planning 6 resource allocator role 17 spokesperson role 16 team leaders 13 technical skills 18 top managers 10
Concept Check 1. Explain the difference between efficiency and effectiveness. 2. What are the four management functions? 3. What are the main differences in the responsibilities of top managers versus middle managers? 4. What distinguishes a first-line manager from a team leader? 5. Describe the three principal managerial roles identified by Henry Mintzberg and give examples of each.
6. How do companies determine that employees would be good managers? 7. How important is competence in the core managerial skills for the different types of managers? 8. List the mistakes that managers commonly make. What distinguishes an arriver from a derailer? 9. Describe how managers typically change in their first year on the job. 10. How does the way a company is managed affect its competitive advantage?
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Self-Assessment IS MANAGEMENT FOR YOU? As you learned in Section 7 of this chapter many managers begin their careers in management with specific ideas about what it means to be the boss. Although you may want to be a manager because of excitement, status, power, or rewards, knowing how to manage is not automatic; it requires specific skills and competencies, as well as a desire to manage. On page 613, in the SelfAssessment Appendix, you will find a 20-question assessment designed to provide insight into your aptitude for management. You will be asked to rate each question according to the following scale:
ML = Most like me SL = Somewhat like me NS = Not sure SU = Somewhat unlike me MU = Most unlike me The assessment is meant to establish your baseline ability in the skills covered in the chapter. It will not tell you whether you should or should not be a manager, or whether you have “what it takes” to be a manager. It will, however, give you feedback on general skills that influence your overall managerial style. So turn to page 613 to get started!
Management Decision BETTING ON AN EMPLOYEE Although you’ve been in your new executive management position for barely a year, you have had abundant opportunities for decision making88. You have had the final say on a new advertising campaign, an employee washroom remodel, and the selection of the company’s uniform vendor. You’ve met with community leaders to discuss your company’s participation in a fundraiser for the local food pantry and with the press to announce your company’s plan to bring 50 new jobs to the area. Surprisingly, however, you’ve had little experience with human resources issues. But that changed this morning, when a colleague mentioned that a relatively new executive assistant named Andrew had taken a second job with another company in the evenings. Andrew has been at your company for only three months, but in that time, proved to be reliable, resourceful, and intelligent. “He’s doing well, though. Doesn’t he like his job here?” you asked your colleague. “He does, but he can earn an extra $250 a week at the second job. He says he’s saving to go back to school,” she responded. “Oh,” you reply. “Well, I’ll talk to him.” Andrew is fast becoming a valuable employee, but the company has a policy against moonlighting. You expect your employees to give their best each day on the
job. If they spend what would otherwise be leisure time working for someone else, they won’t be fresh, alert, and productive when they come to work for you. At the same time, you remember how you worked several jobs to save money for graduate school. If you had been able to make enough money at one job, you wouldn’t have pushed yourself to work three. You think briefly about giving Andrew a raise, but then recall that the company’s policy is not to review new employees for raises or promotions until they’ve spent at least six months on the job. Andrew’s only halfway there. Still, it would be a shame to see such a promising employee lose his spark from overwork and fatigue. Questions 1. How is this decision emblematic of your job as a manager and your transition into that position? 2. What are the advantages and disadvantages to giving Andrew a raise before the customary period? 3. Do you break the company policy and give Andrew a raise three months early, or not? If not, how do you handle the moonlighting situation? Explain your decision. 4. Regardless of Andrew’s situation, would it be better in the long run for your company to continue or end its “no moonlighting” policy?
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Management Team Decision From sports to school to work to civic involvement, working in teams is increasingly part of our experience. But although working in teams is more and more common, making decisions as teams is not necessarily any easier. You will learn more about managing teams in Chapter 10, but to give you more experience with teamwork, a “Management Team Decision” exercise designed for a group of three to five students is included at the end of each chapter. As a group, you must come to a mutually agreeable decision on the scenario presented. Each “Management Team Decision” will focus on a management topic presented in the chapter. For Chapter 1, you’ll work with the management function of planning and organizing, as you decide whether to let a team member have a night off. “CAN I HAVE TOMORROW NIGHT OFF?” It’s 4:00 P.M. as you begin your last inspection of the housewares department.89 Only two hours until you go home, eat your dinner, relax, and spend some muchneeded time with your family. As you finish your rounds, you notice one of your fellow team members lingering at the end of the aisle. As you get closer, you see that it is Frank, a restocker on the evening shift. Frank greets you as you walk to your register, and the two of you make small talk about how many shelves were empty at closing time last night and how much inventory the team had to get ready for this morning. Frank then tells you that his son’s Little League baseball team has made it to the playoffs for the state championship and he wants to take tomorrow night off to watch this important game. As you listen, you remember attending your own son’s games and know how important this game is to both Frank and his son. After all, this opportunity may never occur again. The day after tomorrow, however, is the kickoff to the Memorial Day weekend sale, and that means big sales in every department of the store. It also means droves of customers throwing merchandise into their carts (and on the floors), carrying merchandise around
the store, and either buying it or stuffing it onto an empty shelf at the other end of the store. It’s going to be hectic all weekend, especially tomorrow as your team gets ready. You’ll need all the stockers you can get. It will take seven team members 40 hours to stock all six departments in the store and 15 hours to clean the store for the big opening on Saturday morning. During the eight-hour night shift, five people usually stock the shelves while the other two clean the store. The best person to take Frank’s position is Bobby, but he is on vacation for the next five days. In Bobby’s absence, three of the team’s other stockers are helping out by alternating a double shift; Don is the only one not doing double shifts because he has to get home in time for his wife to get to work. Allowing Frank to take off without a replacement would seriously hamper the other four evening stockers and would jeopardize the stock levels for the sale kickoff. This type of situation is your least favorite aspect of work teams; it would be much nicer if a manager could just decide for you. On the one hand, you empathize with Frank and want to be flexible to his needs, yet on the other hand, the team has to get the store ready for the sale. Not being ready will definitely affect the store’s weekend revenue. You ask Frank to wait while you assemble the rest of the team. Questions 1. As a team, can you organize six people to get all the cleaning and stocking done in a single eight-hour shift before the sale starts Saturday morning? How? 2. Would you let Frank have the night off? Why or why not? 3. What other options might your team consider before making its decision? 4. After you finish the exercise, talk with your team members about the most difficult aspects of working on this exercise. Did anything surprise you about how you worked as a team? What?
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Develop Your Career Potential INTERVIEW TWO MANAGERS Welcome to the first “Develop Your Career Potential” activity! These assignments have one purpose: to help you develop your present and future capabilities as a manager. What you will be learning through these assignments is not traditional “book-learning” based on memorization and regurgitation, but practical knowledge and skills that help managers perform their jobs better. Lessons from some of the assignments—for example, goal setting—can be used for immediate benefit. Other lessons will obviously take time to accomplish, but you can still benefit now by making specific plans for future improvement. Step 1: Interview Two Practicing Managers In her book Becoming a Manager: Mastery of a New Identity, Harvard Business School professor Linda Hill conducted extensive interviews with 19 people in their first year as managers.90 To learn firsthand what it’s like to be a manager, interview two managers that you know, asking them some of the same questions, shown below, that Hill asked her managers. Be sure to interview managers with different levels of experience. Interview one person with at least five years’ experience as a
manager and then interview another person with no more than two years’ experience as a manager. Ask the managers these questions: 1. Briefly describe your current position and responsibilities. 2. What do your subordinates expect from you on the job? 3. What are the major stresses and challenges you face on the job? 4. What, if anything, do you dislike about the job? 5. What do you like best about your job? 6. What are the critical differences between average managers and top-performing managers? 7. Think about the skills and knowledge that you need to be effective in your job. What are they, and how did you acquire them? 8. What have been your biggest mistakes thus far? Could you have avoided them? If so, how? Step 2: Prepare to Discuss Your Findings Prepare to discuss your findings in class or write a report (if assigned by your instructor). What conclusions can you draw from your interview data?
Take Two
Biz Flix 8 Mile
Jimmy “B-Rabbit” Smith, Jr. (Eminem) wants to be a successful rapper and to prove that a white man can create moving sounds. He works days at a plant run by the North Detroit Stamping Company and pursues his music at night, sometimes on the plant’s grounds. The film’s title refers to Detroit’s northern boundary, which divides the city’s white and African American populations. This film gives a gritty look at Detroit’s hip-hop culture in 1995 and Jimmy’s desire to be accepted by it. Eminem’s original songs “Lose Yourself ” and “8 Mile” received Golden Globe and Academy Award nominations. This scene is an edited composite of two brief sequences involving the stamping plant. The first half of the scene appears early in the film as part of “The Franchise” sequence. The second half appears in the last 25 minutes of the film as part of the “Papa Doc Payback” sequence. In the first part of the scene, Jimmy’s car won’t start so he rides the city bus to work and arrives late. The second part occurs after Jimmy is beaten by Papa Doc (Anthony Mackie) and Papa Doc’s gang. Jimmy’s mother (Kim Basinger) returns to their trailer and tells him she won $3,200 at bingo. The film continues to its end with Jimmy’s last battle (a rapper competition). What to Watch for and Ask Yourself
1. What is your perception of the quality of Jimmy's job and his work environment? 2. What is the quality of Jimmy’s relationship with Manny, his foreman (Paul Bates)? Does the relationship change? If it does, why? 3. How would you react to this type of work experience?
Management Workplace Theatrical Lighting Systems
When David Milly started Theatrical Lighting Systems in 1981, entertainment lighting was minimal at most. Often, the managers of an entertainment venue would simply leave the house lights on; if they were really sophisticated, they might highlight the performer with a single spotlight. Over the next two decades, however, sophisticated, computer-controlled lighting systems became the norm, and Milly’s company grew into a full-service provider of lighting equipment, design, and service. To keep up with his company’s growth. Milly had to shift from being the guy in the trusses rigging the lights to being a full-time manager. What to Watch for and Ask Yourself
1. 2. 3. 4.
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Which of the four management functions are addressed in the video? Describe David Milly’s transition to management. List the different kinds of managers referenced in the video. Does David Milly have what it takes to be a manager? Support your answer with concepts from the chapter.
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The History of Management
C H A P T E R
O U T L I N E
Chapter2 What Would You Do? In the Beginning 1. The Origins of Management 1.1 Management Ideas and Practice throughout History 1.2 Why We Need Managers Today
The Evolution of Management 2. Scientific Management 2.1 Father of Scientific Management: Frederick W. Taylor 2.2 Motion Studies: Frank and Lillian Gilbreth 2.3 Charts: Henry Gantt
3. Bureaucratic and Administrative Management 3.1 Bureaucratic Management: Max Weber 3.2 Administrative Management: Henri Fayol
4. Human Relations Management 4.1 Constructive Conflict and Coordination: Mary Parker Follett
4.2 Hawthorne Studies: Elton Mayo 4.3 Cooperation and Acceptance of Authority: Chester Barnard
5. Operations, Information, Systems, and Contingency Management 5.1 5.2 5.3 5.4
Operations Management Information Management Systems Management Contingency Management
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise
Xtra! Four exhibit worksheets, author FAQs, quiz, Management News, and video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and the glossary of terms for this chapter
ISG Steelton–International Steel Group, Steelton, Pennsylvania.1 As the day shift supervisor at the steel plant, you summon the six college students who are working for you this summer doing whatever you need done (sweeping up, sandblasting the inside of boilers that are down for maintenance, running errands, etc.). You walk them across the plant to a field where the company stores scrap metal “leftovers.” The area, about the size of a football field, is stacked with organized piles of metal. You explain that everything they see has just been sold. Metal prices, which have been depressed, have finally risen enough that the company can earn a small profit by selling its scrap. You point out that railroad tracks divide the field into parallel sectors, like the lines on a football field, so that each stack of metal is no more than 15 feet from a track. Each stack contains 390 pieces of metal. Each piece weighs 92 pounds and is about a yard long and just over 4 inches high and 4 inches wide. You tell the students that working as a team, they are to pick up each piece, walk up a ramp to a railroad car that will be positioned next to each stack, and then neatly position and stack the metal for shipment. That’s right, you repeat, 92 pounds, walk up the ramp, and carry the metal onto the rail car. Anticipating their questions, you explain that a forklift could be used only if the metal was stored on wooden pallets (it isn’t), if the pallets could withstand the weight of the metal (they would be crushed), and if you, as their supervisor, had forklifts and people trained to run them (you don’t). In other words, the only way to get the metal into the rail cars is for the students to carry it.
What Would You Do?
Based on an old report from the last time the company sold some of the metal, you know that over an eight-hour shift workers typically loaded about 30 to 31 pieces of metal parts per hour. At that pace, though, it will take your six students six weeks to load all of the metal, and the purchasing manager who sold it says it must be shipped in two weeks. So, without more workers (there’s a hiring freeze) and without forklifts, all of the metal has to be loaded by hand by these six workers in two weeks. But how do you do that? What would motivate the students to work much, much harder than they have all summer? They’ve gotten used to a leisurely pace and easier job assignments. Motivation might help, but motivation will only get so much done. After all, short of illegal steroids, nothing is going to work once muscle fatigue kicks in from carrying those 92-pound pieces of metal up a ramp all day long. So, what can you change about the way the work is done to deal with the unavoidable physical fatigue? If you were the supervisor in charge, what would you do?
STUDY TIP Find a study partner and have him or her quiz you using materials from Xtra! Instead of just giving the simple answer, try to give the rationale as well.
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Certainly, the problems that the ISG steel plant supervisor is facing in the What Would You Do? case are difficult, but they aren’t unique. Each day, managers are asked to solve challenging problems and are given only a limited amount of time, people, or resources. Yet it’s still their responsibility to get things done on time and within budget. Furthermore, most of the management practices and ideas that today’s managers use to solve their daily problems have their roots in the people and ideas you’ll read about in this chapter on the history of management. Indeed, by reading the theories in this chapter, you will be able to figure out a solution to the ISG supervisor’s problems. We begin this chapter by reviewing the origins of management ideas and practice throughout history and the historical changes that produced the need for managers. Next, you’ll learn about various schools of management thought. Beginning with scientific management, you’ll learn about the key contributions made by Frederick Taylor, Frank and Lillian Gilbreth, and Henry Gantt. Next, you’ll read about Max Weber and bureaucratic management and then about Henri Fayol and administrative management. Following that, you’ll learn about human relations management and the ideas of Mary Parker Follett (constructive conflict and coordination), Elton Mayo (Hawthorne Studies), and Chester Barnard (cooperation and acceptance of authority). Finally, you’ll learn about the history of operations management, information management, systems management, and contingency management.
In the Beginning In this textbook, you learn that management is getting work done through others, that strategic plans are overall plans that clarify how a company will serve customers and position itself against competitors over the next two to five years, and that just-in-time inventory is a system in which the parts needed to make something arrive from suppliers just as they are needed at each stage of production. Today’s managers would undoubtedly view those ideas and many of the others presented in the book as self-evident. For example, tell today’s managers to “reward workers for improved production or performance,” “set specific goals to increase motivation,” or “innovate to create and sustain a competitive advantage,” and they’ll respond, “Duh! Who doesn’t know that?” A mere 125 years ago, however, business ideas and practices were so different that today’s widely accepted management ideas would have been as “self-evident” as space travel, cell phones, and the Internet. In fact, 125 years ago, management wasn’t yet a field of study, and there were no management jobs and no management careers. Now, of course, managers and management are such an integral part of the business world that it’s hard to imagine organizations without them. So, if there were no managers 125 years ago, but you can’t walk down the hall today without bumping into one, where did management come from? 1
1
After reading the next section, you should be able to explain the origins of management.
THE ORIGINS OF MANAGEMENT
Management as a field of study may be just 125 years old, but management ideas and practices have actually been used from the earliest times of recorded history. For example, 2,500 years before management researchers called it job enrichment, the Greeks learned that they could improve the productivity of boring repetitious tasks by performing them to music. The basic idea was to use a flute, drum, or song lyrics to pace people to work in unison using the same
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efficient motions, stimulate them to work faster and longer, and make the boring work more fun.2 Although we can find the seeds of many of today’s management ideas throughout history, not until the last two centuries did systematic changes in the nature of work and organizations create a compelling need for managers. Let’s begin our discussion of the origins of management by learning about 1.1 management ideas and practice throughout history and 1.2 why we need managers today.
1.1 Management Ideas and Practice throughout History Examples of management thought and practice can be found throughout history.3 For example, as shown in Exhibit 2.1, in 5000 B.C. in an early instance of managing information, which is part of the control function, Sumerian priests developed a formal system of writing (scripts) that allowed them to record and keep track of the goods, flocks and herds of animals, coins, land, and buildings that were contributed to their temples. Furthermore, to encourage honesty in such dealings, the Sumerians instituted managerial controls that required all priests to submit written accounts of the transactions, donations, and payments they handled to the chief priest. And just like clay or stone tablets and animal-skin documents, these scripts were first used to manage the business of Sumerian temples.4 Only later were the scripts used for religious purposes. Time
Individual or Group
5000 B.C. 4000 B.C. to 2000 B.C.
Sumerians Egyptians
1800 B.C.
Hammurabi
600 B.C.
Nebuchadnezzar
500 B.C.
Sun Tzu
√
400 B.C.
Xenophon
√
400 B.C. 175 284 900 1100 1418
Cyrus Cato Diocletian Alfarabi Ghazali Barbarigo
1436
Venetians
1500
Sir Thomas More Machiavelli
1525
Planning
Organizing
Leading
Controlling
√
√
√
√
√
√
√ √
√
√
√
√ √ √
√
√
√ √ √ √ √ √
√
Source: C. S. George, Jr., The History of Management Thought (Englewood Cliffs, NJ: Prentice Hall, 1972).
Exhibit 2.1 Management Ideas and Practice throughout History Contributions to Management Thought and Practice
Record keeping. Recognized the need for planning, organizing, and controlling when building the pyramids. Submitted requests in writing. Made decisions after consulting staff for advice. Established controls by using witnesses (to vouch for what was said or done) and writing to document transactions. Wage incentives and production control. Strategy; identifying and attacking opponent’s weaknesses. Recognized management as a separate art. Human relations and motion study. Job descriptions. Delegation of authority. Listed leadership traits. Listed managerial traits. Different organizational forms/structures. Numbering, standardization, and interchangeability of parts. Critical of poor management and leadership. Cohesiveness, power, and leadership in organizations.
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A thousand years after the Sumerians, the Egyptians recognized the need for planning, organizing, and controlling; for submitting written requests; and for consulting staff for advice before making decisions. The practical problems they encountered while building the great pyramids no doubt led to the development of these management ideas. The enormity of the task they faced is evident in the pyramid of King Cheops, which contains 2.3 million blocks of stone. Each block had to be quarried, cut to precise size and shape, cured (hardened in the sun), transported by boat for two to three days, moved onto the construction site, numbered to identify where it would be placed, and then shaped and smoothed so that it would fit perfectly into place. It took 20,000 workers 23 years to complete this pyramid; more than 8,000 were needed just to quarry the stones and transport them. A typical “quarry expedition” might include 100 army officers, 50 government and religious officials, and 200 members of the king’s court to lead the expedition; 130 stone masons to cut the stones; and 5,000 soldiers, 800 barbarians, and 2,000 bond servants to transport the stones on and off the ships.5 The remainder of Exhibit 2.1 shows how other management ideas and practices throughout history are clearly related to the management functions in the textbook. Besides the achievements of the Sumerians and Egyptians, we might note King Hammurabi, who established controls by using witnesses and written documents; King Nebuchadnezzar, who pioneered techniques for producing goods and using wages to motivate workers; Sun Tzu, author of The Art of War, who emphasized the importance of strategy and identifying and attacking an opponent’s weaknesses; Xenophon, who recognized management as a distinct and separate art; King Cyrus, who recognized the importance of human relations and used motion study to eliminate wasteful steps and improve productivity; Cato, who espoused the importance of job descriptions; Diocletian, a Roman emperor, who mastered the art of delegation by dividing the widespread Roman Empire into 101 provinces, which were then grouped into 13 dioceses, which were in turn grouped into four geographic divisions; Alfarabi and Ghazali, who began defining what it takes to be a good leader or manager; Barbarigo, who discussed the different ways in which organizations could be structured; the Venetians, who used numbering and standardization to make parts interchangeable; Sir Thomas More, who, in his book Utopia, emphasized the negative societal consequences associated with poor leadership; and Machiavelli, who wrote about the importance of cohesion, power, and leadership in organizations.
1.2 Why We Need Managers Today Working from 8 A.M. to 5 P.M., coffee breaks, lunch hours, crushing rush hour traffic, and punching a time clock are things we associate with today’s working world. Work hasn’t always been this way, however. In fact, the design of jobs and organizations has changed dramatically over the last 500 years. For most of humankind’s history, people didn’t commute to work. In fact, travel of any kind was arduous and extremely rare.6 Work usually occurred in homes or on farms. For example, in 1720, almost 80 percent of the 5.5 million people in England lived and worked in the country. Indeed, as recently as 1870, two-thirds of Americans earned their living from agriculture. Even most of those who didn’t earn their living from agriculture didn’t commute to work. Skilled tradesmen or craftsmen, such as blacksmiths, furniture makers, and leather goods makers who formed trade guilds (the historical predecessors of labor unions) in England as early as 1093, typically worked out of shops in or next to their homes.7 Likewise, cottage workers worked with each other out of small homes that were often built in the shape of a semicircle. A family in each cottage
Chapter 2: The History of Management
would complete a different production step with work passed from one cottage to the next until production was complete. For example, textile work was a common “cottage industry”: families in different cottages would shear the sheep; clean the wool; comb, bleach, and dye it; spin it into yarn; and weave the yarn into cloth. Yet, with no commute, no bosses (workers determined the amount and pace of their work), and no common building (from the time of the ancient Egyptians, Greeks, and Romans through the middle of the nineteenth century, it was rare for more than 12 people to work together under one roof), cottage work was very different from today’s jobs and companies.8 And because these work groups were small and typically self-organized, there wasn’t a strong need for management. During the Industrial Revolution (1750–1900), however, jobs and organizations changed dramatically.9 First, thanks to the availability of power (steam engines and later electricity) and numerous inventions, such as Darby’s coke-smelting process and Cort’s puddling and rolling process (both for making iron) and Hargreave’s spinning jenny and Arkwright’s water frame (both for spinning cotton), low-paid, unskilled laborers running machines began to replace high-paid, skilled artisans. Whereas artisans made entire goods by themselves by hand, this new production system was based on a division of labor: each worker, interacting with machines, performed separate, highly specialized tasks that were but a small part of all the steps required to make manufactured goods. Mass production was born as rope- and chain-driven assembly lines moved work to stationary workers who concentrated on performing one small task over and over again. While workers focused on their singular tasks, managers were needed to effectively coordinate the different parts of the production system and optimize its overall performance. Productivity skyrocketed at companies that understood this. For example, at Ford Motor Company, the time required to assemble a car dropped from 12.5 man hours to just 93 minutes.10 Second, instead of being performed in fields, homes, or small shops, jobs occurred in large, formal organizations where hundreds, if not thousands, of people worked under one roof.11 In 1849, for example, with just 123 workers, Chicago Harvester (the predecessor of International Harvester) ran the largest factory in the United States. In 1870, the Pullman Company, a manufacturer of railroad sleeping cars, was the largest, with only 200 employees. Yet, by 1913, Henry Ford employed 12,000 employees in his Highland Park, Michigan factory alone. With the number of people working in manufacturing having quintupled from 1860 to 1890, and with individual factories employing so many workers under one roof, companies now had a strong need for disciplinary rules (to impose order and structure). For the first time, they needed managers who knew how to organize large groups, work with employees, and make good decisions.
Review 1: The Origins of Management Management as a field of study may be just 125 years old, but management ideas and practices have actually been used since the beginning of recorded history. From the Sumerians in 5000 B.C. to sixteenth-century Europe, there are historical antecedents for each of the functions of management discussed in this textbook: planning, organizing, leading, and controlling. Despite these early examples of management ideas, there was no compelling need for managers until systematic changes in the nature of work and organizations occurred during the last two centuries. As work shifted from families to factories, from skilled laborers to specialized, unskilled laborers, from small, self-organized groups to large factories employing thousands under one roof, and from unique, small batches of production to large standardized mass production, managers were needed to impose order and structure, to motivate and direct
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large groups of workers, and to plan and make decisions that optimized overall company performance by effectively coordinating the different parts of organizational systems.
The Evolution of Management Before 1880, business educators taught basic bookkeeping and secretarial skills, and no one published books or articles about management.12 Over the next 25 years, however, things changed dramatically. In 1881, Joseph Wharton gave the University of Pennsylvania $100,000 to establish a department to educate students for careers in management. By 1911, 30 business schools, including those at Harvard, the University of Chicago, and the University of California, had been established to teach managers how to run businesses.13 In 1886, Henry Towne, president of the Yale and Towne Manufacturing Company, presented his ideas about management to the American Society of Engineers. In his talk entitled “The Engineer as Economist,” he emphasized that managing people and work processes was just as important as engineering work, which focused on machines.14 Towne also argued that management should be recognized as a separate field of study with its own professional associations, journals, and literature where management ideas could be exchanged and developed. Today, because of the forethought and efforts of Joseph Wharton and Henry Towne, if you have a question about management, you can turn to dozens of academic journals (such as The Academy of Management’s Journal or Review, Administrative Science Quarterly, the Strategic Management Journal, and the Journal of Applied Psychology), hundreds of business school and practitioner journals (such as Harvard Business Review, Sloan Management Review, and the Academy of Management Executive), and thousands of books and articles. In the next four sections, you will learn about other important contributors to the field of management and how their ideas shaped our current understanding of management theory and practice.
2 3 4 5
2
After reading the next four sections, which review the different schools of management thought, you should be able to explain the history of scientific management. discuss the history of bureaucratic and administrative management. explain the history of human relations management. discuss the history of operations, information, systems, and contingency management.
SCIENTIFIC MANAGEMENT
Before scientific management, organizational decision making could best be described as “seat-of-the-pants.” Decisions were made haphazardly without any systematic study, thought, or collection of information. Customer orders were transmitted verbally from sales representatives to shop floor supervisors. They were not written down. If the “managers” hired by the company founder or owner decided that workers should work twice as fast, little or no thought was given to worker motivation. If workers resisted, “managers” often resorted to physical beatings to get workers to work faster, harder, or longer. In general, with no incentives for “managers” to cooperate with workers and vice versa, managers and workers gamed the system trying to systematically take advantage of each other. Likewise, nothing was standardized. Each worker did the same job in his or her own way with different methods and different tools.
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In short, there were no procedures to standardize operations, no standards to judge whether performance was good or bad, and no follow-up to determine if productivity or quality actually improved when changes were made.15 This all changed, however, with the advent of scientific management, which, in contrast to the unsystematic “seat-of-the-pants” approach, thoroughly studied and tested different work methods to identify the best, most efficient ways to complete a job.
scientific management Thoroughly studying and testing different work methods to identify the best, most efficient way to complete a job.
Let’s find out more about scientific management by learning about 2.1 Frederick W. Taylor, the father of scientific management; 2.2 Frank and Lillian Gilbreth and motion studies; and 2.3 Henry Gantt and his Gantt charts. soldiering
2.1 Father of Scientific Management: Frederick W. Taylor
© BETTMANN/CORBIS
Frederick W. Taylor (1856–1915), the “father of scientific management,” began his career as a worker at Midvale Steel Company. He was later promoted to patternmaker, supervisor, and then chief engineer. At Midvale, Taylor was deeply affected by his three-year struggle to get the men who worked for him to do, as he called it, “a fair day’s work.” Taylor, who had worked alongside the men as a coworker before becoming their boss, said, “We who were the workmen of that shop had the quantity output carefully agreed upon for everything that was turned out in the shop. We limited the output to about, I should think, one-third of what we could very well have done.” Taylor explained that as soon as he became the boss, “the men who were working under me . . . knew that I was onto the whole game of soldiering, or deliberately restricting output.”16 When Taylor told his workers, “I have accepted a job under the management of this company and I am on the other side of the fence . . . I am going to try to get a bigger output,” the workers responded, “We warn you, Fred, if you try to bust any of these rates [a rate buster was someone who worked faster than the group] we will have you over the fence in six weeks.”17 Over the next three years, Taylor tried everything he could think of to improve output. By doing the job himself, he showed workers that it was possible to produce more output. He hired new “intelligent” workers and trained them himself, hoping they would produce more. But they would not because of “very heavy social pressure” from the other workers. Pushed by Taylor, the workers began breaking their machines so that they couldn’t produce. Taylor responded by fining them every time they broke a machine and for any violation of the rules, no matter how small, such as being late to work. Tensions became so severe that some of the workers threatened to shoot him. Looking back at the situation, Taylor reflected, “It is a horrid life for any man to live, not to be able to look any workman in the face all day long without seeing hostility there and feeling that every man around one is his virtual enemy.” He said, “I made up my mind either to get out of the business entirely and go into some other line of work, or to find some remedy for this unbearable condition.”18 The remedy that Taylor eventually developed was scientific management.
When workers deliberately slow their pace or restrict their work outputs.
rate buster A group member whose work pace is significantly faster than the normal pace in his or her group.
Frederick Taylor is known today as the "father of scientific management." One of his many contributions to modern management is the common practice of giving employees rest breaks throughout the day.
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Develop a science for each element of a man’s work, which replaces the old rule-of-thumb method. Scientifically select and then train, teach, and develop the workman, whereas in the past he chose his own work and trained himself as best he could. Heartily cooperate with the men so as to insure all of the work being done is in accordance with the principles of the science which has been developed. There is an almost equal division of the work and the responsibility between the management and the workmen. The management take over all the work for which they are better fitted than the workmen, while in the past almost all of the work and the greater part of the responsibility were thrown upon the men.
Source: F. W. Taylor, The Principles of Scientific Management (New York: Harper, 1911).
Exhibit 2.2 Taylor’s Four Principles of Scientific Management
Taylor, who once described scientific management as “seventy-five percent science and twenty-five percent common sense,” emphasized that the goal of scientific management was to use systematic study to find the “one best way” of doing each task. To do that, managers must follow the four principles shown in Exhibit 2.2.19 First, “develop a science” for each element of work. Study it. Analyze it. Determine the “one best way” to do the work. For example, one of Taylor’s controversial proposals at the time was to give rest breaks to factory workers doing physical labor. We take morning, lunch, and afternoon breaks for granted, but in Taylor’s day, factory workers were expected to work without stopping.20 When Taylor said that breaks would increase worker productivity, no one believed him. Nonetheless, through systematic experiments, he showed that workers receiving frequent rest breaks were able to greatly increase their daily output. Second, scientifically select, train, teach, and develop workers to help them reach their full potential. Before Taylor, supervisors often hired on the basis of favoritism and nepotism. Who you knew was often more important than what you could do. By contrast, Taylor instructed supervisors to hire “first class” workers on the basis of their aptitude to do a job well. In one of the first applications of this principle, physical reaction times were used to select bicycle ball bearing inspectors who had to be able to examine and reject poor-quality ball bearings as fast as they were produced on a production line. For similar reasons, Taylor also recommended that companies train and develop their workers—a rare practice at the time. Third, cooperate with employees to ensure implementation of the scientific principles. Labor unrest was widespread at the time; the number of labor strikes against companies doubled between 1893 and 1904. As Taylor knew from personal experience, more often than not workers and management viewed each other as the enemy. Taylor’s advice ran contrary to the common wisdom of the day. He said, “The majority of these men believe that the fundamental interests of employees and employers are necessarily antagonistic. Scientific management, on the contrary, has for its very foundation the firm conviction that the true interests of the two are one and the same; that prosperity for the employer cannot exist through a long term of years unless it is accompanied by prosperity for the employee and vice versa; and that it is possible to give the workman what he most wants—high wages—and the employer what he wants—a low labor cost—for his manufactures.”21 The fourth principle of scientific management was to divide the work and the responsibility equally between management and workers. Prior to Taylor, workers alone were held responsible for productivity and performance. But, said Taylor, “Almost every act of the workman should be preceded by one or more preparatory acts of the management which enable him to do his work better and quicker than he otherwise could. And each man should daily be taught by and receive the most friendly help from those who are over him, instead of being, at the one extreme, driven or coerced by his bosses, and at the other left to his own unaided devices.”22
Chapter 2: The History of Management
Above all, Taylor felt these principles could be used to determine a “fair day’s work,” that is, what an average worker could produce at a reasonable pace, day in and day out. Once that was determined, it was management’s responsibility to pay workers fairly for that “fair day’s work.” In essence, Taylor was trying to align management and employees so that what was good for employees was also good for management. In this way, he felt, workers and managers could avoid the conflicts that he had experienced at Midvale Steel. And one of the best ways, according to Taylor, to align management and employees was to use incentives to motivate workers. As Taylor wrote: In order to have any hope of obtaining the initiative of his workmen the manager must give some special incentive to his men beyond that which is given to the average of the trade. This incentive can be given in several different ways, as, for example, the hope of rapid promotion or advancement; higher wages, either in the form of generous piecework prices or of a premium or bonus of some kind for good and rapid work; shorter hours of labor; better surroundings and working conditions than are ordinarily given, etc., and, above all, this special incentive should be accompanied by that personal consideration for, and friendly contact with, his workmen which comes only from a genuine and kindly interest in the welfare of those under him. It is only by giving a special inducement or “incentive” of this kind that the employer can hope even approximately to get the “initiative” of his workmen.23 Although Taylor remains a controversial figure among some academics, nearly a century later it is inarguable that his key ideas have stood the test of time.24 These include using systematic analysis to identify the best methods; scientifically selecting, training, and developing workers; promoting cooperation between management and labor; developing standardized approaches and tools; setting specific tasks or goals and then rewarding workers with financial incentives; and giving workers shorter work hours and frequent breaks. In fact, his ideas are so well accepted and widely used that we take most of them for granted. As eminent management scholar Edwin Locke said, “The point is not, as is often claimed, that he was ‘right in the context of his time,’ but is now outdated, but that most of his insights are still valid today.”25
2.2 Motion Studies: Frank and Lillian Gilbreth The husband and wife team Frank and Lillian Gilbreth are best known for their use of motion studies to simplify work, but they also made significant contributions to the employment of handicapped workers and industrial psychology. Like Frederick Taylor, their early experiences significantly shaped their interests and contributions to management. Though admitted to MIT, Frank Gilbreth (1868–1924) began his career as an apprentice bricklayer. While learning the trade, he noticed the bricklayers using three different sets of motions—one to teach others how to lay bricks, a second to work at a slow pace, and a third to work at a fast pace.26 Wondering which was best, he studied the various approaches and began eliminating unnecessary motions. For example, by designing a stand that could be raised to waist height, he eliminated the need to bend over to pick up each brick. Turning to grab a brick was faster and easier than bending down. By having lower-paid workers place all the bricks with their most attractive side up, bricklayers didn’t waste time turning a brick over to find it. By mixing a more consistent mortar, bricklayers no longer had to tap each brick numerous times to put it in the right position. Together, Gilbreth’s improvements raised productivity from 120 to 350 bricks per hour and from 1,000 bricks to 2,700 bricks per day. As a result of his experience with bricklaying, Gilbreth and his wife Lillian’s developed a long-term interest in using motion study to simplify work,
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time study Timing how long it takes good workers to complete each part of their jobs.
motion study Breaking each task or job into its separate motions and then eliminating those that are unnecessary or repetitive.
improve productivity, and reduce the level of effort required to safely perform a job. Indeed, Frank Gilbreth said, “The greatest waste in the world comes from needless, ill-directed, and ineffective motions.”27 The Gilbreths’ motion study, however, is different from Frederick W. Taylor’s time study.28 Taylor developed time study to put an end to soldiering and to determine what could be considered a fair day’s work. Time study worked by timing how long it took a “first-class man” to complete each part of his job. After allowing for rest periods, a standard time was established, and a worker’s pay would increase or decrease depending on whether the worker exceeded or fell below that standard. By contrast, motion study, as we saw in Frank Gilbreth’s analysis of bricklaying, broke each task or job into separate motions and then eliminated those that were unnecessary or repetitive. Because many motions were completed very quickly, the Gilbreths used motion-picture films, then a relatively new technology, to analyze jobs. Most film cameras, however, were hand-cranked and thus variable in their film speed, so Frank Gilbreth invented the micro chronometer, a large clock that could record time to 1/2,000th of a second. By placing the micro chronometer next to the worker in the camera’s field of vision and attaching a flashing strobe light to the worker’s hands to better identify the direction and sequence of key movements, the Gilbreths could use film to detect and precisely time even the slightest, fastest movements. Motion study typically yielded production increases of 25 to 300 percent.29 It was even used in hospitals to clearly identify the large amount of time that surgeons wasted looking for the next surgical instrument they needed. Frank Gilbreth improved this process by making a nurse responsible for organizing, retrieving, and handing surgical instruments to surgeons, a process still in use today.30 One of the Gilbreths’ most overlooked accomplishments was the critical role they played in rehabilitating and employing handicapped workers.31 After World War I, there were 13 million wounded and handicapped soldiers in the United States and Europe. Frank Gilbreth worried, “What is to be done with the millions of cripples, when their injuries have been remedied as far as possible, and when they are obliged to become again a part of the working community?”32 Sensitive to this issue because of Frank’s recovery from a rheumatism attack that had left him paralyzed from the neck down, the Gilbreths applied motion study to identify the kinds of tasks that handicapped workers could effectively perform. Nearly 75 years before the Americans with Disabilities Act became law (see Chapter 12 for more information), the Gilbreths argued that the government, employers, and engineers had an important role to play in employing handicapped workers. The government’s job, they said, was to provide vocational training. Indeed, in 1918, the U.S. Congress passed the Vocational Rehabilitation Act, adopting most of the Gilbreths’ key recommendations. Employers, they said, should identify jobs that handicapped persons could perform. To help employers do this, the Gilbreths created a large slide show of pictures documenting the hundreds of ways in which the handicapped could effectively perform jobs. Last, according to the Gilbreths, engineers had a responsibility to adapt and design machines so that handicapped workers could use them. Lillian Gilbreth (1878–1972) was an important contributor to management as well. She was the first woman to receive a Ph.D. in Management, as well as the first woman to become a member of the Society of Industrial Engineers and the American Society of Mechanical Engineers. When Frank died in 1924, she continued the work of their management consulting company (which they had shared for over a dozen years) on her own. Lillian, who was concerned with the human side of work, was one of the first contributors to industrial psychology, originating ways to improve office communication, incentive programs, job satisfaction, and management training. Her work also convinced the government to enact laws regarding workplace safety, ergonomics, and child labor.
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2.3 Charts: Henry Gantt Henry Gantt (1861–1919) was first a protégé and then an associate of Frederick Taylor. Gantt is best known for the Gantt chart, but he also made significant contributions to management with respect to pay-for-performance plans and the training and development of workers. As shown in Exhibit 2.3, a Gantt chart, which shows time in various units on the x-axis and tasks on the y-axis, visually indicates what tasks must be completed at which times in order to complete a project. For example, Exhibit 2.3 shows that to start construction on a new company headquarters by the week of November 18, the following tasks must be completed by the following dates: architectural firm selected by October 7, architectural planning done by November 4, permits obtained from the city by November 11, site preparation finished by November 18, and loans and financing finalized by November 18. Though simple and straightforward, Gantt charts were revolutionary in the era of “seat-of-the-pants” management because of the detailed planning information they provided to managers. As Gantt wrote, “By using the graphical forms [the Gantt chart] its value is very much increased, for the general appearance of the sheet is sufficient to tell how closely the schedule is being lived up to; in other words, whether the plant is being run efficiently or not.” Gantt said, “Such sheets show at a glance where the delays occur, and indicate what must have our attention in order to keep up the proper output.” Today, the use of Gantt charts is so widespread that nearly all project management software and computer spreadsheets have the capability to create charts that track and visually display the progress being made on a project. Gantt, who was much more sympathetic toward workers than Frederick Taylor, introduced a significant change to Taylor’s well-known piece-rate reward system. Unlike Taylor’s system, in which payment was completely dependent on production—if you produced at substandard levels, you got substandard pay— Gantt’s task and bonus system did not punish workers for not achieving higher levels of production. Workers who produced more received a daily bonus, but those who didn’t simply received their standard daily pay. The key, according to
A graphical chart that shows which tasks must be completed at which times in order to complete a project or task.
Exhibit 2.3 Gantt Chart for Starting Construction on a New Headquarters
>
Current Week Weeks
Gantt chart
23 Sep to 30 Sep
30 Sep to 7 Oct
7 Oct to 14 Oct
14 Oct to 21 Oct
21 Oct to 28 Oct
28 Oct to 4 Nov
4 Nov to 11 Nov
11 Nov to 18 Nov
18 Nov to 25 Nov
Tasks
Interview and select architectural firm Hold weekly planning meetings with architects Obtain permits and approval from city Begin preparing site for construction Finalize loans and financing
Architect by October 7 Weekly planning with architects by November 4 Permits & approval by oval by November 11 Site construction done by November 18 Financing finalized by November 18 Start building
Begin construction Tasks Weeks
30 Sep to 7 Oct
7 Oct to 14 Oct
14 Oct to 21 Oct
>
Current Week
23 Sep to 30 Sep
21 Oct to 28 Oct
28 Oct to 4 Nov
4 Nov to 11 Nov
11 Nov to 18 Nov
18 Nov to 25 Nov
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Gantt, was that his task and bonus system didn’t punish workers for lower production as they took time to learn how to increase their production efficiency. Production usually doubled under Gantt’s system.33 Finally, Gantt, along with Taylor, was one of the first to strongly recommend that companies train and develop their workers.34 In his work with companies, he found that workers achieved their best performance levels if they were trained first. At the time, however, supervisors, fearing that they could lose their jobs to more knowledgeable workers, were reluctant to teach workers what they knew. Gantt overcame the supervisors’ resistance by rewarding them with bonuses for properly training all of their workers. Said Gantt, “This is the first recorded attempt to make it in the financial interest of the foreman to teach the individual worker, and the importance of it cannot be overestimated, for it changes the foreman from a driver of men to their friend and helper.”35 Thus, Gantt’s approach to training was straightforward: “(1) a scientific investigation in detail of each piece of work, and the determination of the best method and the shortest time in which the work can be done. (2) A teacher capable of teaching the best method and the shortest time. (3) Reward for both teacher and pupil when the latter is successful.”36
Review 2: Scientific Management In contrast to “seat-of-the-pants” management, scientific management recommended studying and testing different work methods to identify the best, most efficient ways to complete a job. According to Frederick W. Taylor, the “father of scientific management,” managers should follow four scientific management principles. First, study each element of work to determine the “one best way” to do it. Second, scientifically select, train, teach, and develop workers to reach their full potential. Third, cooperate with employees to ensure implementation of the scientific principles. Fourth, divide the work and the responsibility equally between management and workers. Above all, Taylor felt these principles could be used to align managers and employees by determining a “fair day’s work,” what an average worker could produce at a reasonable pace, and “a fair day’s pay,” what management should pay workers for that effort. Taylor felt that incentives were one of the best ways to align management and employees. The husband and wife team of Frank and Lillian Gilbreth are best known for their use of motion studies to simplify work. Whereas Taylor used time study to determine “a fair day’s work,” based on how long it took a “first-class man” to complete each part of his job, Frank Gilbreth used film cameras and micro chronometers to conduct motion study to improve efficiency by categorizing and eliminating unnecessary or repetitive motions. The Gilbreths also made significant contributions to the employment of handicapped workers, encouraging the government to rehabilitate them, employers to identify jobs that they could perform, and engineers to adapt and design machines they could use. Lillian Gilbreth, one of the first contributors to industrial psychology, originated ways to improve office communication, incentive programs, job satisfaction, and management training. She also convinced the government to enact laws regarding workplace safety, ergonomics, and child labor. Henry Gantt is best known for the Gantt chart, which graphically indicates when a series of tasks must be completed to perform a job or project, but he also developed ideas regarding pay-for-performance plans (where workers were rewarded for producing more, but were not punished if they didn’t) and worker training (all workers should be trained and their managers should be rewarded for training them). 3
BUREAUCRATIC AND ADMINISTRATIVE MANAGEMENT
The field of scientific management, which quickly developed in the United States between 1895 and 1920, focused on improving the efficiency of manufacturing facilities and their workers. At about the same time, equally important ideas
Chapter 2: The History of Management
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were developing in Europe. German sociologist Max Weber’s ideas about bureaucratic management, which presented a new way to run entire organizations, were published in The Theory of Economic and Social Organization in 1922. Henri Fayol, an experienced French CEO, published his ideas about administrative management, including how and what managers should do in their jobs, in General and Industrial Management in 1916. Though developed at the same time as scientific management, the ideas of Weber and Fayol would not begin to influence American ideas about management until after World War II, when their books were translated into English and published in the United States in 1947 and 1949, respectively. Let’s find out more about Weber’s and Fayol’s contributions to management by learning about 3.1 bureaucratic management and 3.2 administrative management.
3.1 Bureaucratic Management: Max Weber Today, when we hear the term bureaucracy, we think of inefficiency and “red tape,” incompetence and ineffectiveness, and rigid administrators blindly enforcing nonsensical rules. When German sociologist Max Weber (1864–1920) first proposed the idea of bureaucratic organizations, however, monarchies and patriarchies, not bureaucracies, were associated with these problems. In monarchies, where kings, queens, sultans, and emperors ruled, and patriarchies, where a council of elders, wise men, or male heads of extended families ruled, the top leaders typically achieved their positions by virtue of birthright. For example, when the queen died, her oldest son became king, regardless of his intelligence, experience, education, or desire. Likewise, promotion to prominent positions of authority in monarchies and patriarchies was based on who you knew, who you were (heredity), or ancient rules and traditions. In short, for much of humankind’s history, people often rose to positions of wealth and power because of family, political connections, or personal loyalty. It was against this historical background of monarchical and patriarchic rule that Weber proposed the then new idea of bureaucracy. Bureaucracy comes from the French word bureaucratie. Since bureau means desk or office and cratie or cracy means to rule, bureaucracy literally means to rule from a desk or office. According to Weber, however, bureaucracy is “the exercise of control on the basis of knowledge.”37 So, in a bureaucracy, rather than ruling by virtue of favoritism, or personal or family connections, people would lead by virtue of their rational-legal authority—in other words, their knowledge, expertise, or experience. Furthermore, the aim of bureaucracy is to achieve an organization’s goals in the most efficient way possible. Exhibit 2.4 shows the seven elements that, according to Weber, characterize bureaucracies. First, instead of hiring people because of their family or political connections, or personal loyalty, they should be hired because their technical training or education qualifies them to do their jobs well. Second, along the same lines, promotion within the company would no longer be based on who you knew or who you were (heredity), but on your experience or achievements. And to further limit the influence of personal connections in the promotion process, managers, rather than organizational owners, should decide who gets promoted. Third, each position or job is part of a chain of command that clarifies who reports to whom throughout the organization. Those higher in the chain of command have the right, if they so choose, to give commands, take action, and make decisions concerning activities occurring anywhere below them in the chain. Unlike many monarchies or patriarchies, however, those lower in the chain of command are protected by a grievance procedure that gives them the right to appeal the decisions of those in higher positions. Fourth, to increase efficiency and effectiveness, tasks and responsibilities are separated and assigned to those best qualified to complete them. Furthermore, authority
bureaucracy The exercise of control on the basis of knowledge, expertise, or experience.
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Qualification-based hiring:
Employees are hired on the basis of their technical training or educational background.
Merit-based promotion:
Promotion is based on experience or achievement. Managers, not organizational owners, decide who is promoted.
Chain of commands:
Each job occurs within a hierarchy, the chain of command, in which each position reports and is accountable to a higher position. A grievance procedure and a right to appeal protect people in lower positions.
Division of labor:
Tasks, responsibilities, and authority are clearly divided and defined.
Impartial application of rules and procedures:
Rules and procedures apply to all members of the organization and will be applied in on impartial manner, regardless of one’s position or status
Recorded in writing:
All administrative decisions, acts, rules, or procedure will be recorded in writing.
Managers separate from owners:
The owners of an organization should not manage or supervise the organization.
Source: M. Weber, The Theory of Economic and Social Organization, trans. A. Henderson & T. Parsons (New York: The Free Press, 1947), 329-334.
Exhibit 2.4 Elements of Bureaucratic Organizations
is vested in positions, not people. If you move to a different job, your authority increases or decreases commensurate with the responsibilities of that job. And, to reduce confusion and conflict, the authority of each position or job is also clearly divided and defined. Fifth, because of his strong distaste for favoritism, Weber felt that an organization’s rules and procedures should apply to all members, regardless of their position or status. Sixth, to ensure consistency and fairness over time and across different leaders and supervisors, all rules, procedures, and decisions should be recorded in writing. Finally, to reduce favoritism, “professional” managers rather than company owners, should manage or supervise the organization. When viewed in historical context, Weber’s ideas about bureaucracy represent a tremendous improvement in how organizations should be run. Fairness supplanted favoritism, the goal of efficiency replaced the goal of personal gain, and logical rules and procedures took the place of traditions or arbitrary decision making. Today, however, after more than a century of experience we recognize that bureaucracy has limitations as well. In bureaucracies, managers are supposed to influence employee behavior by fairly rewarding or punishing employees for compliance or noncompliance with organizational policies, rules, and procedures. In reality, however, most employees would argue that bureaucratic managers emphasize punishment for noncompliance much more than rewards for compliance. Ironically, bureaucratic management was created to prevent just this type of managerial behavior. By encouraging managers to apply well-thought-out rules, policies, and procedures impartially and consistently to everyone in the organization, bureaucratic control is supposed to make companies more efficient, effective, and fair. Perversely, as you’ll read in Chapter 16 on control, it can sometimes have just the opposite effect. Managers who use bureaucratic control often put following the rules above all else. Another limitation of bureaucratically controlled companies is that due to their rule- and policy-driven decision making, they can be highly resistant to change and slow to respond to customers and competitors. Despite its advantages over monarchical and patriarchic organizational forms, even Weber recognized bureaucracy’s limitations. He called it the “iron cage” and said, “Once fully established, bureaucracy is among those social structures which are the hardest to destroy.”38
3.2 Administrative Management: Henri Fayol Though his work was not translated and widely recognized in the United States until 1949, Frenchman Henri Fayol (1841–1925) was as important a contributor to the field of management as Frederick Taylor. Like Taylor and Frank and Lillian Gilbreth, Fayol’s work experience significantly shaped his thoughts and
Chapter 2: The History of Management
ideas about management. But, whereas Taylor’s ideas changed companies from the shop floor up, Fayol’s ideas, which were shaped by his experience as a managing director (CEO), generally changed companies from the board of directors down.39 Fayol is best known for developing five functions of managers and 14 principles of management, as well as for his belief that management could and should be taught to others. Like his father, Henri Fayol enrolled in France’s National School of Mines, graduating with an engineering degree at the age of 19.40 His first job as a mining engineer for the Commentry coal mine was spent learning how to contain and put out underground fires. In this job, he began the valuable habit of recording notes about actions or happenings that either improved or decreased the productivity of the mine and its workers.41 For instance, he wrote this note to himself about the cause of a work stoppage that occurred when his boss, the managing director, was gone: “May 1861. The horse on the sixth level of the St. Edmund pits broke its leg this morning. I made out an order for its replacement. The stableman refused to accept the order because it did not bear the Director’s signature. The Director was absent. No one was designated to replace him. Despite my entreaties, the stableman persisted in his refusal. He had express orders, he said [not to provide a replacement horse unless the managing director ordered]. The injured horse was not replaced and production at the sixth level was lost.”42 It’s very possible that this experience helped him form the now widely accepted management principle that a manager’s authority should equal his or her responsibility.43 In other words, because he was responsible for the productivity and production of coal at the St. Edmund’s pit, his boss, the managing director, should have given him the authority to take actions, such as signing for a replacement horse, commensurate with that responsibility (see Chapter 9 for more on delegation, authority, and responsibility). It’s likely, however, that the most formative events in Fayol’s business career came during his 20 plus years as the managing director (CEO) of a vertically integrated steel company that owned several coal and iron ore mines and employed, 10,000 to 13,000 workers. Fayol was initially hired by the board of directors to shut the “hopeless” steel company down. The company was facing increased competition from English and German steel companies, which had lower costs, and from new steel mills in northern and eastern France, which were closer to major markets and thus could avoid the large shipping costs incurred by Fayol’s company, which was located in central France.44 In the five years before Fayol became CEO, production had dropped more than 60 percent, from 38,000 to 15,000 annual metric tons. The company had exhausted a key supply of coal needed for steel production, had already shut one steel mill down, and was losing money at another.45 The company had quit paying dividends to shareholders and had no cash to invest in new technology, such as blast furnaces, that could lower its costs and increase productivity. Therefore, the board hired Fayol as CEO to quickly dissolve and liquidate the business. But, after “four months of reflection and study,” he presented the board with a plan, backed by detailed facts and figures, to save the company.46 With little to lose, the board agreed. Fayol then began the process of turning the company around by obtaining supplies of key resources, such as coal and iron ore; using research to develop new steel alloy products; carefully selecting key subordinates in research, purchasing, manufacturing, and sales and then delegating responsibility to them; and cutting costs by moving the company to a better location closer to key markets.47 Looking back 10 years later, Fayol attributed his and the company’s success to changes in management practices. He wrote, “When I assumed the responsibility for the restoration of Decazeville, I did not rely on my technical superiority. . . . I relied on my ability as an organizer [and my] skill in handling men (manoeuvrier des hommes).”48 Fayol concluded, “With the same [coal] mines, the same [steel] mills, the same financial resources, the same markets, the same Board of Directors and the
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Exhibit 2.5
same personnel, solely with the application of a new way of running the company [italics added], the firm experienced a rise [in its performance] comparable to its earlier decline.”49 Based on his experience as a CEO, Fayol argued that “the success of an enterprise generally depends much more on the administrative ability of its leaders than on their technical ability.”50 And, as you learned in Chapter 1, Fayol argued that this means that if managers are to be successful, they need to perform five managerial functions or elements: planning, organizing, coordinating, commanding, and controlling.51 Today, though, most Management textbooks have dropped the coordinating function and now refer to Fayol’s commanding function as “leading.” Consequently, Fayol’s management functions are widely known as planning (determining organizational goals and a means for achieving them), organizing (deciding where decisions will be made, who will do what jobs and tasks, and who will work for whom), leading (inspiring and motivating workers to work hard to achieve organizational goals), and controlling (monitoring progress toward goal achievement and taking corrective action when needed). In addition, according to Fayol, effective management is based on the 14 principles in Exhibit 2.5.
Fayol’s 14 Principles of Management
1. Division of work: 2. Authority and responsibility:
3. Discipline: 4. Unity of command: 5. Unity of direction: 6. Subordination of individual interests to the general interest: 7. Remuneration: 8. Centralization: 9. Scalar chain:
10. Order:
11. Equity:
12. Stability of tenure of personnel:
13. Initiative: 14. Esprit de corps:
Increase production by dividing work so that each worker completes smaller tasks or job elements. A manager’s authority, which is the “right to give orders,” should be commensurate with the manager’s responsibility. However, organizations should enact controls to prevent managers from abusing their authority. Clearly defined rules and procedures are needed at all organizational levels to ensure order and proper behavior. To avoid confusion and conflict, each employee should report to and receive orders from just one boss. One person and one plan should be used in deciding the activities to be used to accomplish each organizational objective. Employees must put the organization’s interests and goals before their own. Compensation should be fair and satisfactory to both the employees and the organization; that is, don’t overpay or underpay employees. Avoid too much centralization or decentralization. Strike a balance depending on the circumstances and employees involved. From the top to the bottom of an organization, each position is part of a vertical chain of authority in which each worker reports to just one boss. For the sake of simplicity, communication outside normal work groups or departments should follow the vertical chain of authority. To avoid conflicts and confusion, order can be obtained by having a place for everyone and having everyone in their place; in other words, there should be no overlapping responsibilities. Kind, fair, and just treatment for all will develop devotion and loyalty. This does not exclude discipline, if warranted, and consideration of the broader general interest of the organization. Low turnover, meaning a stable work force with high tenure, benefits an organization by improving performance, lowering costs, and giving employees, especially managers, time to learn their jobs. Because it is a “great source of strength for business,” managers should encourage the development of initiative, the ability to develop and implement a plan, in others. Develop a strong sense of morale and unity among workers that encourages coordination of efforts.
Sources: H. Fayol, General and Industrial Management (London: Pittman & Sons, 1949); M. Fells, “Fayol Stands the Test of Time,” Journal of Management History 6 (2000): 345–360; C. Rodrigues, “Fayol’s 14 Principles of Management Then and Now: A Framework for Managing Today’s Organizations Effectively,” Management Decision 39 (2001): 880–889.
Chapter 2: The History of Management
Finally, along with Joseph Wharton, Fayol was one of the first to argue that management could and should be taught to others. In short, Fayol believed that the principles of management could be taught in colleges and universities and that managers are not born but can be made through a combination of education and experience.
Review 3: Bureaucratic and Administrative Management Today, when we hear bureaucracy, we think of inefficiency and “red tape.” Yet, according to German sociologist Max Weber, bureaucracy, that is, running organizations on the basis of knowledge, fairness, and logical rules and procedures, would accomplish organizational goals much more efficiently than monarchies and patriarchies, where decisions were made on the basis of personal or family connections, personal gain, and arbitrary decision making. Bureaucracies are characterized by seven elements: qualification-based hiring; merit-based promotion; chain of command; division of labor; impartial application of rules and procedures; recording rules, procedures, and decisions in writing; and separating managers from owners. Nonetheless, bureaucracies are often inefficient and can be highly resistant to change. The Frenchman Henri Fayol, whose ideas were shaped by his 20 plus years of experience as a CEO, is best known for developing five management functions (planning, organizing, coordinating, commanding, and controlling) and 14 principles of management (division of work, authority and responsibility, discipline, unity of command, unity of direction, subordination of individual interests to the general interest, remuneration, centralization, scalar chain, order, equity, stability of tenure of personnel, initiative, and esprit de corps). He is also known for his belief that management could and should be taught to others. 4
HUMAN RELATIONS MANAGEMENT
As we have seen, scientific management focused on improving the efficiency of manufacturing facilities and their workers; bureaucratic management focused on using knowledge, fairness, and logical rules and procedures to increase the efficiency of the entire organization; and administrative management focused on how and what managers should do in their jobs. In contrast, the human relations approach to management focused on the psychological and social aspects of work. Under the human relations management approach, people were more than just extensions of machines; they were valuable organizational resources whose needs were important and whose efforts, motivation, and performance were affected by the work they did and their relationships with their bosses, coworkers, and work groups. In other words, according to human relations management, efficiency alone is not enough to produce organizational success. Success also depends on treating workers well. Let’s find out more about human relations management by learning about 4.1 Mary Parker Follett’s theories of constructive conflict and coordination; 4.2 Elton Mayo’s Hawthorne Studies; and 4.3 Chester Barnard’s theories of cooperation and acceptance of authority.
4.1 Constructive Conflict and Coordination: Mary Parker Follett Mary Parker Follett (1868–1933) was a social worker with a degree in political science who, in her 50s, after 25 years of working with schools and nonprofit organizations, began lecturing and writing about management and working extensively as a consultant for business and government leaders in the United States and Europe. Although her contributions were overlooked for decades, perhaps because she was a woman or perhaps because they were so different, many of today’s “new” management ideas can clearly be traced to her work.
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domination An approach to dealing with conflict in which one party deals with the conflict by satisfying its desires and objectives at the expense of the other party’s desires and objectives.
compromise An approach to dealing with conflict in which both parties deal with the conflict by giving up some of what they want in order to reach agreement on a plan to reduce or settle the conflict.
integrative conflict resolution An approach to dealing with conflict in which both parties deal with the conflict by indicating their preferences and then working together to find an alternative that meets the needs of both.
Follett is known for developing ideas regarding constructive conflict and coordination. Constructive conflict, also called cognitive conflict, which is discussed in Chapter 5 on decision making and Chapter 10 on teams, is one of Follett’s most important contributions. Unlike most people, then and now, who view conflict as bad, Follett believed that conflict could be beneficial. She said that conflict is “the appearance of difference, difference of opinions, of interests. For that is what conflict means—difference.” She went on to say, “As conflict—difference—is here in this world, as we cannot avoid it, we should, I think, use it to work for us. Instead of condemning it, we should set it to work for us. Thus we shall not be afraid of conflict, but shall recognize that there is a destructive way of dealing with such moments and a constructive way.”52 Follett believed that managers could deal with conflict in three ways: domination, compromise, and integration. She said, “Domination, obviously, is a victory of one side over the other. This is the easiest way of dealing with conflict, the easiest for the moment but not usually successful in the long run.” “As for the second way of dealing with conflict, that of compromise, we understand [it] well, for it is the way we settle most of our controversies; each side gives up a little in order to have peace, or, to speak more accurately, in order that the activity which has been interrupted by the conflict may go on.” Follett continued, “Yet no one really wants to compromise, because that means a giving up of something. Is there then any other method of ending conflict? There is a way beginning now to be recognized at least, and even occasionally followed: when two desires are integrated, that means that a solution has been found in which both desires have found a place that neither side has had to sacrifice anything.” So, rather than one side dominating the other or both sides compromising, the point of integrative conflict resolution is to have both parties indicate their preferences and then work together to find an alternative that meets the needs of both. According to Follett, “Integration involves invention, and the clever thing is to recognize this, and not to let one’s thinking stay within the boundaries of two alternatives which are mutually exclusive.” Indeed, Follett’s ideas about the positive use of conflict and an integrative approach to conflict resolution predate accepted thinking in the negotiation and conflict resolution literature by six decades (see the best-selling book Getting to Yes: Negotiating Agreement without Giving In by Roger Fisher, William Ury, and Bruce Patton). Follett’s writing on the role of coordination in organizations is another of her important contributions. According to Follett, there are four fundamental principles of organizations: 1. 2. 3. 4.
Coordination as reciprocal relating all the factors in a situation. Coordination by direct contact of the responsible people concerned. Coordination in the early stages. Coordination as a continuing process.
Follett’s first principle recognizes that most things that occur in organizations are interrelated. Make just one change in an organization, and other changes, some expected but some not, will occur. Cut costs, and quality may be affected. Change the raw ingredients used to make a product, and manufacturing procedures may no longer work. Marketing offers customers special incentives to buy more products, and operations has to work overtime to keep up with the increased demand. Accordingly, because of these interrelations, leaders at different levels and in different parts of the organization must coordinate their efforts to solve problems and produce the best overall outcomes in an integrative way. In short, managers cannot manage their part of the organization while ignoring its other parts. What each manager does affects other parts of the organization and vice versa. Follett explains her second principle, coordination by direct contact of the people concerned, and her third principle, coordination in the early stages, this
Chapter 2: The History of Management
way: “Direct contact must begin in the earliest stages of the process. . . . If the heads of departments confront each other with finished policies, agreement will be found difficult. . . . But if these heads meet while they are forming their policies, meet and discuss the questions involved, a successful co-relation is far more likely to be reached. Their thinking has not become crystallized. They can still modify one another.”53 In other words, better outcomes will be achieved if the people affected by organizational issues and problems meet early and directly to address them. Working with those involved or affected will produce more effective solutions than will isolating or ignoring them. With respect to her fourth principle, coordination as a continuing process, Follett said: “It is a fallacy to think that we can solve problems—in any final sense. The belief that we can do so is a drag upon our thinking. What we need is a process for meeting problems. When we think we have solved one, well, by the very process of solving, new elements or forces come into the situation and you have a new problem on your hands to be solved.” Consequently, there is always a need for early, integrative coordination of the people affected by organizational situations, problems, or issues. The need for coordination never goes away. Exhibit 2.6 summarizes, in Follett’s own words, her contributions to management regarding power (“with” not “over” others), the giving of orders (discussing instructions and resentment), authority (flowing from job knowledge and experience, not position), leadership (that leaders make the team and that aggressive, dominating leaders may be harmful), coordination, and control (should be based on facts, information, and coordination). In the end, Follett’s contributions added significantly to our understanding of the human, social, and psychological sides of management. Peter Parker, the former chairman of the London School of Economics, said about Follett: “People often puzzle about who is the father of management. I don’t know who the father was, but I have no doubt about who was the mother.”54
4.2 Hawthorne Studies: Elton Mayo Australian-born Elton Mayo (1880–1948) is best known for his role in the famous Hawthorne Studies at the Western Electric Company. His ideas became popular during the early twenthieth century when labor unrest, dissatisfaction, and protests (some of them violent) were widespread in the United States, Europe, and Asia. In 1919 alone, for example, more than four million American workers went on strike.55 Working conditions contributed to the unrest. Millions of workers in large factories toiled at boring, repetitive, unsafe jobs for low pay. Employee turnover was high and absenteeism was rampant. With employee turnover approaching 380 percent in his automobile factories, Henry Ford had to double the daily wage of his manufacturing workers from $2.50, the going wage at the time, to $5.00 to keep enough workers at their jobs. Workers joined labor unions to force companies to improve their pay and working conditions. In 1913, the federal government created the U.S. Department of Labor “to foster, promote and develop the welfare of working people, to improve their working conditions and to enhance their opportunities for profitable employment.” In 1935, Congress passed the National Labor Relations Act (also known as the Wagner Act), which gave workers the legal right to form unions and collectively bargain with their employers, but prevented companies from engaging in unfair labor practices to “bust” unions. In this historical context, Mayo’s work on the Hawthorne Studies proved highly relevant as managers looked for ways to increase productivity and also to improve worker satisfaction and working conditions.56 The Hawthorne Studies were conducted in several stages between 1924 and 1932 at a Western Electric plant in Chicago, Illinois. Although Mayo didn’t join
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Constructive conflict
• ”As conflict—difference—is here in this world, as we cannot avoid it, we should, I think, use it to work for us. Instead of condemning it, we should set it to work for us.”
Power
• ”Power might be defined as simply the ability to make things happen, to be a causal agent, to initiate change.” • ”It seems to me that whereas power usually means power-over, the power of some person or group over some other person or group, it is possible to develop the conception of power-with, a jointly developed power, a co-active, not a coercive power.”
The giving of orders
• ”Probably more industrial trouble has been caused by the manner in which orders have been given than in any other way.” • ”But even if instructions are properly framed, are not given in an overbearing manner, there are many people who react violently against anything that they feel is a command. It is often the command that is resented, not the thing commanded.” • ”An advantage of not exacting blind obedience, of discussing your instructions with your subordinates, is that if there is any resentment, any come-back, you get it out into the open, and when it is in the open you can deal with it.”
Authority
• ”Indeed there are many indications in the present reorganization of industry that we are beginning to rid ourselves of the over and under idea, that we are coming to a different conception of authority, many indications that there is an increasing tendency to let the job itself, rather than the position occupied in a hierarchy, dictate the kind and amount of authority.” • ”Authority should go with knowledge and experience, that is where obedience is due, no matter whether it is up the line or down.”
Leadership
• ”Of the greatest importance is the ability to grasp a total situation. . . . Out of a welter of facts, experience, desires, aims, the leader must find the unifying thread. He must see a whole, not a mere kaleidoscope of pieces. . . . The higher up you go, the more ability you have to have of this kind.” • ”The leader makes the team. This is pre-eminently the leadership quality—the ability to organize all the forces there are in an enterprise and make them serve a common purpose.” • ”[It is wrong to assume] that you cannot be a good leader unless you are aggressive, masterful, dominating. But I think not only that these characteristics are not caption the qualities essential to leadership but, on the contrary, that they often militate directly against leadership.”
Coordination
• ”One, which I consider a very important trend in business management is a system of crossfunctioning between the different departments. . . . Each department is expected to get in touch with certain others.” • ”Many businesses are now organized in such a way that you do not have an ascending and descending ladder of authority. You have a degree of cross-functioning, of inter-relation of departments, which means a horizontal rather than a vertical authority.” • ”The most important thing to remember about unity is—that there is no such thing. There is only unifying. You cannot get unity and expect it to last a day—or five minutes. Every man in a business should be taking part in a certain process and that process is unifying.”
Control
• ”Control is coming more and more to mean fact-control rather than man-control.” • ”Central control is coming more and more to mean the co-relation of many controls rather than a superimposed control.”
Source: Mary Parker Follett, Mary Parker Follett—Prophet of Management: A Celebration of Writings from the 1920s, ed. P. Graham (Boston: Harvard Business School Press, 1995).
Exhibit 2.6 Some of Mary Parker Follett’s Key Contributions to Management
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the studies until 1928, he played a significant role thereafter, writing about the results in his book, The Human Problems of an Industrial Civilization.57 The first stage of the Hawthorne Studies investigated the effects of lighting levels and incentives on employee productivity in the Relay Test Assembly Room, where workers took approximately a minute to put “together a coil, armature, contact springs, and insulators in a fixture and secure the parts by means of four machine screws.”58 Two groups of six experienced female workers, five to do the work and one to supply needed parts, were separated from the main part of the factory by a 10-foot partition and placed at a standard work bench with the necessary parts and tools. Over the next five years, the experimenters introduced various levels and combinations of lighting, financial incentives, and rest pauses (work breaks) to study the effect on productivity. Curiously, however, whether they increased or decreased the lighting, paid workers based on individual production or group production, or increased or decreased the number and length of rest pauses, production levels increased. In fact, Mayo and his fellow researchers were surprised that production steadily increased from 2,400 relays per day at the beginning of the study to 3,000 relays per day five years later. The question, however, was why? Mayo and his colleagues eventually concluded that two things accounted for the results. First, substantially more attention was paid to these workers than to workers in the rest of the plant. Mayo wrote, “Before every change of program [in the study], the group is consulted. Their comments are listened to and discussed; sometimes their objections are allowed to negate a suggestion. The group unquestionably develops a sense of participation in the critical determinations and becomes something of a social unit.”59 The “Hawthorne Effect” cannot be understood, however, without giving equal importance to the “social units,” which became intensely cohesive groups. (For years, the “Hawthorne Effect” has been incorrectly defined as increasing productivity by paying more attention to workers.60) Mayo said, “What actually happened was that six individuals became a team and the team gave itself wholeheartedly and spontaneously to cooperation in the experiment. The consequence was that they felt themselves to be participating freely and without afterthought, and were happy in the knowledge that they were working without coercion from above or limits from below.”61 Together, the increased attention from management and the development of a cohesive work group led to significantly higher levels of job satisfaction and productivity. Mayo and his research colleagues concluded:62 • • • •
“There has been an important increase in contentment among the girls working in the test-room conditions.” “There has been a decrease in absences of about 80 percent among the girls since entering the test-room group.” “The changed working conditions have resulted in creating an eagerness on the part of the operators to come to work in the morning.” “The operators have no clear idea as to why they are able to produce more in the test room; but as shown in the replies to the questionnaires . . . there is the feeling that better output is in some way related to the distinctly pleasanter, freer, and happier work conditions.”
Although Mayo’s studies used several variables, like lighting and incentives to increase productivity, it turned out that productivity increased no matter what changes were made. Mayo concluded that paying more attention to the workers and the development of the workers into a cohesive group produced higher levels of productivity and job satisfaction.
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For the first time, human factors related to work were found to be more important than the physical conditions or design of the work. In short, workers’ feelings and attitudes affected their work. The next stage of the Hawthorne Studies was conducted in the Bank Wiring Room, where “the group consisted of nine wiremen, three solderers, and two inspectors. Each of these groups performed a specific task and collaborated with the other two in completion of each unit of equipment. The task consisted of setting up the banks of terminals side-by-side on frames, wiring the corresponding terminals from bank to bank, soldering the connections, and inspecting with a test set for short circuits or breaks in the wire. One solderman serviced the work of the three wireman.”63 In contrast to the results from the Relay Test Assembly Room where productivity increased no matter what the researchers did, productivity dropped in the Bank Wiring Room. Again, the question was why? Interestingly, Mayo and his colleagues found that group effects were just as responsible for the decline in performance in the Bank Wiring Room as they were for the increased performance in the Relay Test Assembly Room. The difference was that the workers in the Bank Wiring Room had been an existing work group for some time and had already developed strong negative norms that governed their behavior. For instance, despite a group financial incentive for production, the group members decided that they would wire only 6,000 to 6,600 connections a day (depending on the kind of equipment they were wiring), well below the production goal of 7,300 connections that management had set for them. Individual workers who worked at a faster pace were socially ostracized from the group, or “binged,” hit on the arm, until they slowed their work pace. Thus, the group’s behavior was reminiscent of the soldiering that Frederick Taylor had observed. Mayo concluded, “Work [was] done in accord with the group’s conception of a day’s work; this was exceeded by only one individual who was cordially disliked.”64 In the end, the Hawthorne Studies demonstrated that the workplace was more complex than previously thought, that workers were not just extensions of machines, and that financial incentives weren’t necessarily the most important motivator for workers. By highlighting the crucial role, positive or negative, that groups, group norms, and group behavior play at work, Mayo strengthened Mary Parker Follett’s point about reciprocal relating—make just one change in an organization and others, some expected and some unexpected, will occur. Thanks to Mayo and his colleagues and their work on the Hawthorne Studies, managers better understood the effect that group social interactions and employee satisfaction and attitudes had on individual and group performance.
4.3 Cooperation and Acceptance of Authority: Chester Barnard
organization A system of consciously coordinated activities or forces created by two or more people.
Like Henri Fayol, Chester Barnard (1886–1961) had experiences as a top executive that shaped his views of management. Barnard began his career in 1909 as an engineer and translator for AT&T, becoming a general manager at Pennsylvania Bell Telephone in 1922 and then president of New Jersey Bell in 1927.65 Furthermore, like Fayol’s views, Barnard’s ideas, published in his classic book, The Functions of the Executive, influenced companies from the board of directors down. Barnard is best known for his ideas about cooperation, the executive functions that promote it, and the acceptance of authority. In The Functions of the Executive, Barnard proposed a comprehensive theory of cooperation in formal organizations. In fact, he defines an organization as a “system of consciously coordinated activities or forces of two or more persons.”66 In other words, “organization” occurs whenever two people work
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together for some purpose. Thus, organization occurs when classmates work together to complete a class project, when Habitat for Humanity volunteers donate their time to build a house, and when managers work with subordinates to reduce costs, improve quality, or increase sales. Why did Barnard place so much emphasis on cooperation? Because, he said, it is the “abnormal, not the normal, condition.” “Failure to cooperate, failure of cooperation, failure of organization, disorganization, disintegration, destruction of organization—and reorganization—are characteristic facts of human history.”67 Barnard argued that managers can gain others’ cooperation by completing three executive functions: securing essential services from individuals, formulating an organization’s purpose and objectives, and providing a system of communication. By “securing essential services from individuals,” Barnard meant that managers must find ways to encourage workers to willingly cooperate with each other and management to achieve organizational goals. According to Barnard, managers can gain workers’ willing cooperation by offering them material incentives, such as money or tangible rewards; nonmaterial incentives, such as recognition, prestige, personal power, improved working conditions, or satisfaction of perA DANGEROUS MIX: POWER, AUTHORITY, sonal ideals or needs; and associational incentives, such as the AND AUTONOMY chance to work with people they like or to be more directly Because of their authority to hire, fire, and involved or associated with key events or processes in the orreward employees, nearly all managers have ganization.68 the power to influence those who work for them. With jobs, promotions, or pay raises By “formulating an organization’s purpose and objecon the line, few will challenge what the tives,” top executives unify people in the company by making boss wants, unless, as Chester Barnard sugclear what needs to be accomplished. If the organization’s purgests, they’re asked to do something wrong. pose is clear, then each person in each job at each level of the Even then, the boss’s power and authority company should understand how his or her daily activities, becan be enough to get some subordinates to haviors, and choices contribute to the accomplishment of that comply. Most dangerous of all, though, are purpose. This is the ultimate form of cooperation in an managers who have power, authority, and organization. If, however, the organization’s purpose is not autonomy. Adding the freedom and indepenclear, then departmental or personal objectives may become dence of autonomy to power and authority is more important than organizational objectives. The result is a like dropping a tank of gasoline on an alless cohesive organization in which workers are less likely to ready burning fire. An explosion is sure to result. Why? The reason is that managers cooperate to accomplish the organization’s goals. with autonomy may begin to believe that the By “providing a system of communication,” Barnard meant “rules” don’t apply to them. When that hapthat managers must create an organizational structure with a pens, they’re much more likely to engage in clear hierarchy (i.e., responsibilities, tasks, and jobs) and hire questionable, unethical, or illegal behavior. and promote the right people into management, that is, talAccording to professors John Dunkelberg and ented people with the right skills and education who will put Debra Ragin Jessup who studied six manthe organization’s needs before their own. Those managers, in agers who engaged in spectacular cases of turn, are responsible for promoting cooperation by effectively unethical and illegal behavior, “The desire to communicating the organization’s purpose and objectives and commit unethical acts is nothing without the by minimizing organizational politics. autonomy to do so. Autonomy is the Finally, the extent to which people willingly cooperate in an factor in the equation that sends intelligent successful people over the ethical edge. organization depends on how workers perceive executive auThey believe they are invincible because thority and whether they’re willing to accept it. According to no one is looking over their shoulder.” The Barnard, for many managerial requests or directives, there is a solution, say Dunkelberg and Jessup, is to zone of indifference, in which acceptance of managerial make sure that even the most powerful peoauthority is automatic. For example, if your boss asks you for a ple in the company haves checks, balances, copy of the monthly inventory report, and compiling and writand controls on their autonomy. 69 ing that report is part of your job, you think nothing of the request and automatically send it. In general, people will be indifferent to managerial directives or orders if they (1) are understood, (2) are consistent with the purpose of the organization, (3) are compatible with the people’s personal interests, and (4) can actually be carried
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out by those people. Acceptance of managerial authority (i.e., cooperation) is not automatic, however. Ask people to do things contrary to the organization’s purpose or to their own benefit and they’ll put up a fight. So, while many people assume that managers have the authority to do whatever they want, Barnard, referring to the “fiction of superior authority,” believed that workers ultimately grant managers their authority. Consequently, rather than threatening workers to force cooperation, Barnard maintained that it is more effective to induce their willing cooperation through incentives, clearly formulated organizational objectives, and effective communication throughout the organization.
Review 4: Human Relations Management Unlike most people who view conflict as bad, Mary Parker Follett, the “mother of modern management,” believed that conflict could be a good thing, that it should be embraced and not avoided, and that of the three ways of dealing with conflict—domination, compromise, and integration—the latter was the best because it focuses on developing creative methods for meeting conflicting parties’ needs. Follett also used four principles to emphasize the importance of coordination in organizations. She believed that the best overall outcomes are achieved when leaders and workers at different levels and in different parts of the organization directly coordinate their efforts to solve problems in an integrative way. Elton Mayo is best known for his role in the Hawthorne Studies at the Western Electric Company. In the first stage of the Hawthorne Studies, production went up because the increased attention paid to the workers in the study and their development into a cohesive work group led to significantly higher levels of job satisfaction and productivity. In the second stage, productivity dropped because the workers had already developed strong negative norms, in which individual “rate busters” who worked faster than the rest of the team or cooperated with management were ostracized or “binged.” The Hawthorne Studies demonstrated that workers’ feelings and attitudes affected their work, that financial incentives weren’t necessarily the most important motivator for workers, and that group norms and behavior play a critical role in behavior at work. Chester Barnard, president of New Jersey Bell Telephone, emphasized the critical importance of willing cooperation in organizations and said that managers could gain workers’ willing cooperation through three executive functions: securing essential services from individuals (through material, nonmaterial, and associational incentives), unifying the people in the organization by clearly formulated the organization’s purpose and objectives, and providing a system of communication. Finally, although most managerial requests or directives will be accepted because they fall within the zone of indifference, Barnard maintains that it is more effective to induce cooperation through incentives, clearly formulated organizational objectives, and effective communication throughout the organization. Ultimately, he says, workers grant managers their authority, not the other way around. 5
OPERATIONS, INFORMATION, SYSTEMS, AND CONTINGENCY MANAGEMENT
In this last section, we review four other significant historical approaches to management that have influenced how today’s managers produce goods and services on a daily basis, gather and manage the information they need to understand their businesses and make good decisions, understand how the different parts of the company work together as a whole, and recognize when and where particular management practices are likely to work.
Chapter 2: The History of Management
To better understand these ideas, let’s learn about 5.1 operations management; 5.2 information management; 5.3 systems management; and 5.4 contingency management.
5.1 Operations Management In Chapter 18, you will learn about operations management, which involves managing the daily production of goods and services. In general, operations management uses a quantitative or mathematical approach to find ways to increase productivity, improve quality, and manage or reduce costly inventories. The most commonly used operations management tools and methods are quality control, forecasting techniques, capacity planning, productivity measurement and improvement, linear programming, scheduling systems, inventory systems, work measurement techniques (similar to the Gilbreths’ motion studies), project management (similar to Gantt’s charts), and cost-benefit analysis.70 Today, with those tools and techniques, we take it for granted that manufactured goods will be made with standardized, interchangeable parts; that the design of those parts will be based on specific, detailed plans; and that manufacturing companies will aggressively manage inventories to keep costs low and increase productivity. Surprisingly, these key elements of operations management have some rather strange origins: guns, geometry, and fire. Since 1526, in Gardone, Italy, the family of Fabbrica d’Armi Pietro Beretta has been making world-renowned Beretta firearms and gun barrels. Throughout most of the company’s history, skilled craftsmen made the lock, stock, and barrel of a Beretta gun by hand. After each part was made, a skilled gun finisher assembled the parts into a complete gun. The gun finisher did not simply screw the different parts of a gun together, as is done today, however. Instead, each handmade part required extensive finishing and adjusting so that it would fit together with the other handmade gun parts. This was necessary because, even when made by the same skilled craftsman, no two parts were alike. In fact, gun finishers played a role similar to that of fine watchmakers, who meticulously assembled expensive watches—without them, the product simply wouldn’t work. Today, we would say that these parts were low quality because they varied so much from part to part. You’ll learn more about variation and quality in Chapter 18 on managing service and manufacturing operations. All this changed in 1791, however, when the U.S. government, worried about a possible war with France, ordered 40,000 muskets from private gun contractors. Like Beretta, all but one contractor built handmade muskets assembled by skilled gun finishers who made sure that all the parts fit together. Thus, each musket was unique. If a part broke, a replacement part had to be handcrafted. But one contractor, Eli Whitney of New Haven, Connecticut, who is better known for his invention of the cotton gin, determined that if gun parts were made accurately enough, guns could be made with standardized, interchangeable parts. So he designed machine tools that allowed unskilled workers to make each gun part the same as the next. Said Whitney, “The tools which I contemplate to make are similar to an engraving on copper plate from which may be taken a great number of impressions perceptibly alike.” Years passed before Whitney delivered his 10,000 muskets to the U.S. government. In 1801, however, he demonstrated the superiority of interchangeable parts to President-elect Thomas Jefferson by quickly and easily assembling complete muskets from randomly picked piles of musket parts. Today, because of Whitney’s ideas, most products, from cars to toasters to space shuttles, are manufactured using standardized, interchangeable parts. But, even with this advance, manufacturers still faced the significant limitation that
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they could not produce a part unless they had seen or examined it firsthand. Thanks to Gaspard Monge, a Frenchman of modest beginnings, this soon changed. In Monge’s time, maps were crude, often inaccurate, and almost never up-to-date. In 1762, however, as a 16-year-old, Monge drew a large-scale map of the town of Beaune, France. He developed new surveying tools and systematic methods of observation so that every feature on the map was in proportion and correctly placed. Monge’s advanced skills as a draftsman led to his appointment to the prestigious Ècole Militaire de Mézières, a military institute, where one of his first assignments was to determine the proper placement of cannons for a military fortress. This task normally involved long, complicated mathematical computations, but using the geometrical principles he had developed as a draftsman, Monge calculated his estimates so quickly that, at first, commanders refused to believe they were accurate. Soon, however, they realized the importance of his breakthrough and protected it as a military secret for more than a decade.71 Monge’s greatest achievement, however, was his book Descriptive Geometry. In it, he explained techniques for drawing three-dimensional objects on paper. For the first time, precise drawings permitted manufacturers to make standardized, interchangeable parts without first examining a prototype. Today, thanks to Monge, manufacturers rely on CAD (computer-aided design) and CAM (computer-aided manufacturing) to take three-dimensional designs straight from the computer to the factory floor. Once standardized, interchangeable parts became the norm, and parts could be made from design drawings alone, manufacturers ran into a costly problem that they had never faced before: too much inventory. Inventory is the amount and number of raw materials, parts, and finished products that a company has in its possession. In fact, large factories were accumulating parts inventories sufficient for two to three months, much more than they needed on a daily basis to run their manufacturing operations. Ironically, a solution to this problem was found in 1905 when the Oldsmobile Motor Works in Detroit burned down. At a time when cars were far too expensive for most Americans, Oldsmobile had become the leading automobile manufacturer in the United States by being the first to produce an affordable car. So, when the Oldsmobile factory burned down, management rented a new production facility to get production up and running as quickly as possible. But, because the new facility was much smaller, there was no room to store large stockpiles of inventory (which the company couldn’t afford anyway as it was short on funds). Therefore, the company made do with what it called “hand-to-mouth inventories,” in which each production station had only enough parts on hand to do a short production run. Fortunately, since all of its parts suppliers were close by, Oldsmobile could place orders in the morning and receive them in the afternoon (even without telephones), just like today’s computerized, just-in-time inventory systems. So, contrary to common belief, just-in-time inventory systems were not invented by Japanese manufacturers. Instead, they were invented out of necessity a century ago because of a fire. You can learn more about just-in-time inventory management in Chapter 18.
5.2 Information Management For most of recorded history, information has been costly, difficult to obtain, and slow to spread. Because of the immense labor and time it took to handcopy information, books, manuscripts, and written documents of any kind were rare and extremely expensive. Word of Joan of Arc’s death in 1431 took 18 months to travel from France across Europe to Constantinople (now Istanbul, Turkey). Most people literally heard news and information from the town
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Time clocks have changed dramatically since their invention in the 1890s. These pictures of factory workers punching out in 1949 with oblong cards and of a nurse "punching in" today with a biometric palm scan show how the technology has evolved in the last 50 plus years.
COURTESY OF RECOGNITION SYSTEMS
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crier (Hear ye! Hear ye!) or from minstrel and acting groups who relayed information as they traveled from town to town. As you will learn in Chapter 17, however, accurate, timely, relevant, and complete information has been important to businesses throughout history. The earliest recorded use of written information occurred nearly 60,000 years ago when Cro-Magnons, from whom modern humans descended, created and recorded a lunar calendar. The calendar consisted of 28 symbols carved into a reindeer antler and indicated when the waters would be high. The calendar was used to track and kill deer, bison, and elk that would gather at river crossings. Indeed, 99 percent of the clay tablets and animal-skin documents unearthed in our earliest cities are business and economic texts. Traders, craftspeople, and local businesspeople used them to keep track of trades, orders, and how much money (or gold, pigs, or chickens) was owed to whom. Consequently, throughout history, organizations have pushed for and quickly adopted new information technologies that reduce the cost or increase the speed with which they can acquire, store, retrieve, or communicate information. The first “technologies” to truly revolutionize the business use of information were paper and the printing press. In the fourteenth century, waterpowered machines were created to pulverize rags into pulp to make paper. Paper prices, which were already lower than those of animal-skin parchments, quickly dropped by 400 percent. Less than a half-century later, Johannes Gutenberg invented the printing press, which greatly reduced the cost and time needed to copy written information. For instance, in 1483 in Florence, Italy, a scribe would charge one florin (an Italian unit of money) to hand-copy one document page. By contrast, a printer would set up and print 1,025 copies of the same document for just three florins. Within 50 years of its invention, Gutenberg’s printing press cut the cost of information by 1,000 percent! What Gutenberg’s printing press did for publishing, the manual typewriter did for daily communication. Before 1850, most business correspondence was written by hand and copied using the “letter press.” With the ink still wet, the letter would be placed into a tissue paper “book.” A hand press would then be used to squeeze the “book” and copy the still-wet ink onto the tissue paper.
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By the 1870s, manual typewriters made it cheaper, easier, and faster to produce and copy business correspondence. Of course, in the 1980s, slightly more than a century later, typewriters were replaced by personal computers and word processing software for identical reasons. As the volume of printed information increased, businesses needed new ways to organize and make sense of it. Vertical file cabinets and the Woodruff file, invented in 1868, represented major advances in information storage and retrieval. Once sales orders or business correspondence were put in the proper file drawer, they could easily and quickly be found by anyone familiar with the system. The cash register, invented in 1879, kept sales clerks honest by recording all sales transactions on a roll of paper securely locked inside the machine. But managers soon realized that its most important contribution was better management and control of their business. For example, department stores could track performance and sales by installing separate cash registers in the food, clothing, and hardware departments. Time clocks, introduced in the 1890s, helped businesses keep track of worker hours and costs. Finally, businesses have always looked for information technologies that would speed access to timely information. For instance, the Medici family, which opened banks throughout Europe in the early 1400s, used posting messengers to keep in contact with their more than 40 “branch” managers. The post messengers, who predated the U.S. Postal Service Pony Express by 400 years, could travel 90 miles per day, twice what average riders could cover, because the Medicis were willing to pay for the expense of providing them with fresh horses. This need for timely information also led companies to quickly adopt the telegraph in the 1860s, the telephone in the 1880s, and, of course, Internet technologies in the last decade. See Chapter 17 for more on how companies are using today’s technologies to lower the cost and increase the speed with which accurate, timely, relevant, and complete information is acquired.
5.3 Systems Management
system A set of interrelated elements or parts that function as a whole.
subsystem Smaller systems that operate within the context of a larger system.
synergy When two or more subsystems working together can produce more than they can working apart.
closed systems Systems that can sustain themselves without interacting with their environments.
open systems Systems that can sustain themselves only by interacting with their environments, on which they depend for their survival.
Today’s companies are much more complex than they used to be. They are larger and employ more people. They most likely manufacture, service, and finance what they sell, not only in their home markets, but in foreign markets throughout the world, too. They also operate in complex, fast-changing, competitive, global environments that can quickly turn competitive advantages into competitive disadvantages. How, then, can managers make sense of this complexity, both within and outside their organizations? One way to deal with organizational and environmental complexity is to take a systems view of organizations, which derived from theoretical models in biology and social psychology in the 1950s and 1960s.72 A system is a set of interrelated elements or parts that function as a whole. So, rather than viewing one part of an organization as separate from the other parts, a systems approach encourages managers to complicate their thinking by looking for connections between the different parts of the organization. Indeed, one of the more important ideas in the systems approach to management is that organizational systems are composed of parts or subsystems, which are simply smaller systems within larger systems. Subsystems and their connections matter in systems theory because of the possibility for managers to create synergy. Synergy occurs when two or more subsystems working together can produce more than they can working apart. In other words, synergy occurs when 1 + 1 = 3. Whereas closed systems can function without interacting with their environments, nearly all organizations should be viewed as open systems that interact with their environments and depend on them for survival. Therefore, rather than viewing what goes on within the organization as separate from what goes
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Economy Suppliers
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Components of General Environment
Technical Trends
Components of Specific Environment
Competitors
Organization
Inputs from General & Specific Environments
• Management Knowledge • Manufacturing, Production, and Service Techniques
Exhibit 2.7 Systems View of Organizations
Products
Inputs Transformed into Outputs
Services Feedback from Environments
Industry Regulation Political/Legal Trends
Advocacy Groups
Customers Sociocultural Trends
on outside it, the systems approach also encourages managers to look for connections between the different parts of the organization and the different parts of its environment. Successful interaction with organizational environments is critical because open systems tend toward entropy, which is the inevitable and steady deterioration of a system. As shown in Exhibit 2.7, organizations operate in two kinds of complex environments. The general environment consists of the economy and the technological, sociocultural, and political/legal trends that indirectly affect all organizations. Changes in any sector of the general environment eventually affect most organizations. In addition, each organization has a specific environment that is unique to that firm’s industry and directly affects the way it conducts day-to-day business. The specific environment includes customers, competitors, suppliers, industry regulation, and advocacy groups. Both the general and specific environments are discussed in detail in Chapter 3. As Exhibit 2.7 shows, organizational systems obtain inputs from the general and specific environments. Managers and workers then use their management knowledge and manufacturing techniques to transform those inputs into outputs, such as products and services, which are then consumed by persons or organizations in the environment, which, in turn, provide feedback to the organization, allowing managers and workers to modify and improve their products or services. A systems view of organizations offers several advantages. First, it forces managers to view their organizations as part of and subject to the competitive, economic, social, technological, and legal/regulatory forces in their environments.73 Second, it also forces managers to be aware of how the environment affects specific parts of the organization. Third, because of the complexity and difficulty of trying to achieve synergies between different parts of the organization, the systems view encourages managers to focus on better communication and cooperation within the organization. Finally, it makes managers acutely aware that good internal management of the organization may not be enough to ensure survival. Survival also depends on making sure that the organization continues to satisfy critical environmental stakeholders, such as shareholders, employees, customers, suppliers, governments, and local communities. For more on ideas related to the systems view of management, see Chapter 3 on environments and cultures, Chapter 4 on ethics and social responsibility, Chapter 6 on organizational strategy, and Chapter 8 on global management.
entropy The inevitable and steady deterioration of a system.
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5.4 Contingency Management
contingency approach Holds that there are no universal management theories and that the most effective management theory or idea depends on the kinds of problems or situations that managers or organizations are facing at a particular time and place.
Earlier you learned that the goal of scientific management was to use systematic study to find the “one best way” of doing each task and then use that “one best way” everywhere. The problem, as you may have gathered from reading about the various approaches to management, is that no one in management seems to agree on what that “one best way” is. Furthermore, more than 100 years of management research has shown that there are clear boundaries or limitations to most management theories and practices. No management ideas or practices are universal. Though they may work much of the time, none works all the time. But, then, how is a manager to decide what theory to use? Well, it depends on the situation. The contingency approach to management precisely states that there are no universal management theories and that the most effective management theory or idea depends on the kinds of problems or situations that managers or organizations are facing at a particular time.74 In short, the “best way” depends on the situation. One of the practical implications of the contingency approach to management is that management is much harder than it looks. In fact, because of the clarity and obviousness of management theories (OK, most of them), students and workers often wrongly assume that if management would take just a few simple steps, then a company’s problems would be quickly and easily solved. If this were true, few companies would have problems. A second implication of the contingency approach is that managers need to look for key contingencies that differentiate today’s situation or problems from yesterday’s situation or problems. Moreover, it means that managers need to spend more time analyzing problems, situations, and employees before taking action to fix them. Finally, it means that as you read this text and learn about management ideas and practices, you need to pay particular attention to qualifying phrases such as “usually,” “in these situations,” “for this to work,” and “under these circumstances.” Doing so will help you identify the key contingencies that will help you become a better manager.
Review 5: Operations, Information, Systems, and Contingency Management Operations management uses a quantitative or mathematical approach to find ways to increase productivity, improve quality, and manage or reduce costly inventories. The manufacture of standardized, interchangeable parts, the graphical and computerized design of parts, and the accidental discovery of just-in-time management were some of the most important historical events in operations management. For most of recorded history, information has been costly, difficult to obtain, and slow to spread. Consequently, throughout history, organizations have pushed for and quickly adopted new information technologies that reduce the cost or increase the speed with which they can acquire, store, retrieve, or communicate information. Historically, some of the most important technologies that have revolutionized information management were the use of horses in Italy in the 1400s, the creation of paper and the printing press in the fourteenth and fifteenth centuries, the manual typewriter in 1850, vertical file cabinets for storage of information and the telegraph in the 1860s, cash registers in 1879, the telephone in the 1880s, time clocks in the 1890s, the personal computer in the 1980s, and the Internet in the 1990s. A system is a set of interrelated elements or parts that function as a whole. Organizational systems obtain inputs from the general and specific environments. Managers and workers then use their management knowledge and manufacturing techniques to transform those inputs into outputs, such as products and services, which are then consumed by persons or organizations in the environment, which, in turn, provide feedback to the organization, allowing
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managers and workers to modify and improve their products or services. Organizational systems must also address the issues of synergy, open versus closed systems, and entropy. Finally, the contingency approach to management precisely states that there are no universal management theories. The most effective management theory or idea depends on the kinds of problems or situations that managers or organizations are facing at a particular time. This means that management is much harder than it looks and that managers need to look for key contingencies by spending more time analyzing problems and situations before they take action to fix them.
Key Terms bureaucracy, 45 closed systems, 60 compromise, 50 contingency approach, 62 domination, 50 entropy, 61
Gantt chart, 43 integrative conflict resolution, 50 motion study, 42 open systems, 60 organization, 54 rate buster, 39
scientific management, 39 soldiering, 39 subsystem, 60 synergy, 60 system, 60 time study, 42
Concept Check 1. Why do modern companies need managers? 2. How are historical management ideas and practices related to the topics you will study in this textbook? 3. Explain the contributions of Taylor, the Gilbreths, and Gantt to the theory of scientific management. 4. Compare bureaucratic and administrative management. 5. Explain the principles of Mary Parker Follett’s human resource management. 6. What lessons did we learn from the Hawthorne studies? Summarize Bernard’s contributions on cooperation and acceptance of authority.
7. Discuss the contributions of Whitney and Monge to operations management. 8. How do companies use systems management to make sense of organizational and environmental complexity? 9. Identify the major milestones in the history of managing information. 10. Explain contingency management.
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Self-Assessment DEALING WITH CONFLICT Conflict is an inevitable part of work life (and life in general), and the success of individual employees, teams, and entire organizations depends on how they manage interpersonal conflict. How do you deal with conflict? Do you look for it, avoid it, or something in between? On page 614 in the Self-Assessment Appendix, you will find a 20-question assessment designed to provide insight into how you manage conflict. This
information will provide you with a baseline for future development of conflict-management skills. You can also use the Chapter 2 self-assessment as a precursor to doing the Management Team Decision below. At a minimum it will raise your awareness of how you handle differences of opinion before you begin working in a team. It may even inspire you to make conscious changes in your conflict-management style, helping you—and your team—be more effective.
Management Decision SCRIPTED SERVICE It has been two years since you took over your family’s chain of specialty neighborhood bakeries located in areas with high foot traffic.75 Throughout the city, your stores are the choice for birthday cakes, Christmas cookies, Valentine’s Day cupcakes, and the daily doughnut. Even though sales are steady, you want to grow and are having a difficult time figuring out exactly how to increase revenues. For the past three weeks, you have spent each day in a different store, stocking cases, slicing bread, and generally pitching in where needed, but mostly you have been observing. As luck would have it, about 80 percent of your stores are located near or next to a Starbucks. On your way to the stores each morning, you have stopped to get your morning coffee, and at each Starbucks, you have been greeted quickly, chatted with the clerk, ordered, heard your order repeated across the bar, used a card to pay, been asked if you want your balance, and told to have a nice day. Today is the same. As you wait for your coffee, you think about the contrast between this prescribed sequence and what you have been seeing in your own stores. Even though your clerks serve customers efficiently, they do so in various ways. Some clerks are outgoing, talking and laughing with the customer while assembling the order. Other clerks are more reserved, filling the order quickly but with little conversation and barely a smile. Now that you have noticed these differences, everywhere you shop you’ve been paying attention to sales speech patterns, which appear scripted and repetitive but reliable. From the grocery (“Do you have any coupons?” and “Paper or plastic?”) to the fast-food
restaurant (“Do you want fries with that?” and “For here or to go?”), the patterns are most noticeable during busy periods. Clerks follow the same speech sequence with every customer. A little research reveals that numerous companies require employees to follow a script. At McDonald’s, it is a speech-only script: for example, workers must say “May I help you, ma’am?” instead of “Can I help someone?” At Olive Garden, the script adds actions to the words: greet the table within 30 seconds of sitdown; take the drink order within three minutes; during ordering, suggest five items (drink, side dish, dessert, specials, and special offers); after food arrives, check back within three minutes. At Starbucks, things are more relaxed, but there is still a script to guide employee interactions with customers looking for a latte. After a week of observing these scripted encounters, you begin to wonder if you should write a sales script for your bakery staff. If interactions were standardized, you might be able to increase efficiency and sales revenue. A script might be a great help during the morning and the after-school rush, as well as a useful training tool for new hires; it might help them feel more confident behind the counter. Since you want to grow, a script could also help you get up and running faster in new locations. But how would your current employees feel about it? They all have different ways of working with customers. About half of them have been with you for many years and know the ropes already. And how would your customers respond? The bakery could lose some of its neighborly appeal when customers recognize the canned speech.
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You hear the barrista call out, “Triple-shot Venti extra-hot latte,” so you go collect your coffee. She looks you right in the eye, smiles, and says, “Have a nice day!” Questions 1. Which historical management technique best describes scripted service speech and scripted employee behavior? Explain your choice.
2. Do you implement a customer-encounter script at your bakeries? Why or why not? 3. Imagine that you have decided to implement a script for your frontline employees. Write the service script for bakery clerks.
Management Team Decision PEER REVIEW FOR CONFLICT RESOLUTION Your troubles began when the teenage clerk at one of your convenience stores wrestled a gun away from a would-be robber. On hearing the story, your friends said, “How brave!” and “Did you give him an award?” but you and the other managers in the company all had a very different reaction. You know you will have to fire the employee for violating a long-standing and wellknown company policy against heroism. Convenience store robberies are a common occurrence, and if your (mostly young) workers, manning dozens of stores, begin to attempt behind-the-counter vigilantism, you will have a serious problem on your hands. Despite the unanimous mindset of your management team, you realize that firing the employee outright may create negative fallout among the other employees. At least one employee in particular is likely to vocally protest the firing. As you sit with your team trying to decide how to resolve this issue, one of your managers proposes implementing a peer review process at the company. A panel of employees would be responsible for arbitrating disputes and resolving any disagreements between how managers enforce the rules and how employees experience those rules being enforced. Advocates trumpet the benefits of peer review systems. Peer reviews are practical and cost-effective, particularly when compared with formal legal arbitration, and they allow disputes to be resolved internally. Because peer reviews give employees some say in the outcome of disputes, the employees are more likely to find the decisions credible and acceptable. Many managers also like peer reviews because they help to avert the backlash that a manager may experience for unilaterally disciplining an employee who has violated company rules. Detractors, however, say that peer reviews may give employees too much control over the management decision process. Review panels effectively diffuse the decision-making function throughout the organization in a way that is counter to the centralized decision making of traditionally structured companies. In addi-
tion, creating and maintaining peer review systems requires a commitment of time and resources. Employees lose work hours (i.e., productivity) when they participate on panels. And management should consult with a knowledgeable attorney to make sure that review panel procedures conform to National Labor Relations Board (NLRB) dictates about work teams. The process must be shared with all employees, who also must be trained in the process. And what will you do if employees reverse a management decision? Nonetheless, the number of companies using peer review systems is increasing as their popularity grows. One consultant alone has over 500 companies including Kodak, Hooters, Marriott, and Red Lobster using his peer review process. For this exercise, assemble a team of five students to act as the management team for the convenience store chain in this scenario. Questions 1. Which historical management theory gives the best justification for implementing peer review systems? Which theory would not support peer reviews? 2. Do you implement a peer review process in the convenience store scenario? Explain your decision. 3. Regardless of your decision from question 2, as a team draw up guidelines for a peer review process. What would you need to consider if you were to create a review panel? For example, do you need to set restrictions on the ratio of employees to managers on the panel (will there even be managers on the panel?). How many years of service should an employee have to participate? Should the panel include a mix of employees from different departments? 4. Now, following the guidelines you established in question 3, imagine that your team is the review panel for the convenience store clerk who foiled a robbery. Discuss the situation and come to a decision regarding the outcome. Do you fire the employee, warn the employee, or commend his actions?
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Develop Your Career Potential KNOW WHERE MANAGEMENT IS GOING As you read in the chapter management theories are dynamic. In other words, they change over time, sometimes very rapidly. In addition, management theories have often been cumulative, meaning that later theorists tend to build on theories previously advanced by other scholars. Thus, new theory, then becomes the starting point for yet another theory that can either refine or refute the management thinking of the day. One way to prepare for your career as a manager is by becoming aware of management trends today. The best (and easiest) way to do that is by regularly combing through business newspapers and periodicals. You will always find at least one article that relates to management concepts, and as you scan the business press over time, you will see which theories are influencing current management thinking the most. By understanding management history and management present, you will be better able to anticipate changes to management ideas in the future. This exercise is designed to introduce you to the business press and to help you make the connection between the concepts you learn in the classroom and real-world management activities. Done regularly, it will provide you with invaluable insights into business activities at all types of organizations around the world.
Activities 1. Find a current article of substance in the business press (The Wall Street Journal, The Financial Times, Fortune, BusinessWeek, Inc., etc) that discusses topics covered in this course. Although this is only Chapter 2, you will be surprised by the amount of terminology you have already learned. If you are having trouble finding an article, read through the table of contents on pages vii-xii to familiarize yourself with the names of concepts that will be presented later in the term. Read your article carefully, making notes about relevant content. 2. Write a one-paragraph summary of the key points in your article. Then, list the terms or concepts critical to understanding the article, and provide definitions of those terms. If you are unfamiliar with a term or concept that is central to the article, do some research in your textbook or see your professor during office hours. Relate these key points to the concepts in your text by citing page numbers. 3. How does your article relate to the management theories covered in this chapter? Explain the situation detailed in your article in terms of the history of management.
Take Two
Biz Flix In Good Company
In Good Company is a 2004 film featuring Dennis Quaid in the role of Dan Foreman, an advertising sales executive at a top publication. After a corporate takeover, Dan is placed under a supervisor half his age named Carter Duryea (played by Topher Grace). Matters are made worse when Carter becomes romantically involved with Dan’s daughter Alex, a beautiful college student (Scarlett Johansson). The film was originally titled Synergy. You can still hear references to that title that were kept in the final cut of the film. What to Watch for and Ask Yourself
1. Does Carter Duryea’s explanation of synergy reflect the discussion of synergy in Section 5.3? 2. What potential downside with Carter’s plan does Dan identify during the meeting? Do you agree with Dan or Carter? 3. What kind of system is Carter Duryea describing in the clip? Explain.
Management Workplace Café Pilon
Even though today’s managers may be unaware of the history of management, their decisions still reflect the thinking of early theorists. Indeed, management decisions in the modern marketplace cannot help but be informed by the work conducted by management theorists decades ago. Such is the case of Rowland Roasters, a Miami-based coffee company doing business under the name of its most popular brand, Cafe´ Pilon. What to Watch for and Ask Yourself
1. What evidence do you see of the effects of early management theories? 2. How has Rowland Roasters built on the foundation formed by the traditions of operations management? 3. What evidence of systems management do you see? What could Café Pilon do to move more toward a systems management approach? 4. Can you envision a way for Café Pilon to experience synergy?
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C H A P T E R
O U T L I N E
Chapter3 What Would You Do? External Environments 1. Changing Environments 1.1 1.2 1.3 1.4
Environmental Change Environmental Complexity Resource Scarcity Uncertainty
2. General Environment 2.1 2.2 2.3 2.4
Economy Technological Component Sociocultural Component Political/Legal Component
3. Specific Environment 3.1 3.2 3.3 3.4
Customer Component Competitor Component Supplier Component Industry Regulation Component 3.5 Advocacy Groups
4. Making Sense of Changing Environments 4.1 Environmental Scanning 4.2 Interpreting Environmental Factors 4.3 Acting on Threats and Opportunities
Internal Environments 5. Organizational Cultures: Creation, Success, and Change 5.1 Creation and Maintenance of Organizational Cultures 5.2 Successful Organizational Cultures 5.3 Changing Organizational Cultures
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise Xtra! Five exhibit worksheets, author FAQs, quiz, Management News, and the video clips from the chapter with exercises Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
Wendy’s International Headquarters, Dublin, Ohio.1 After viewing the movie Super Size Me, you think to yourself, “Thank goodness this movie was not about Wendy’s.” Super Size Me tells the story of filmmaker Morgan Spurlock who ate only McDonald’s food for a month. During that time, he ate every item on the menu at least once and ate super-sized items only when asked. The results? Eating 5,000 calories per day, Spurlock gained 25 pounds, increased his cholesterol from a healthy 160 to an unhealthy 230, and developed liver problems that later subsided after he lost weight. With 66 percent of Americans overweight, obesity is—no pun intended—at epic proportions, and that could affect Wendy’s in terms of lawsuits, regulation, and complaints from public interest groups. You are aware that a group of obese teenagers sued McDonald’s, claiming its food had made them fat. Though a judge threw the case out, your corporate attorneys have warned that Wendy’s could be a target and that the cost of defending the company could easily exceed several million dollars per case, and that’s only if you win. Meanwhile, the Food and Drug Administration has been pressuring restaurants to voluntarily provide complete nutritional information on their menus. One of your competitors, the Ruby Tuesday restaurant chain, now lists the calories, fat grams, net carbs, and fiber for each item on its menu. But, you’re not sure you want your customers looking at nutritional information right before they order. Would they still order a Wendy’s Classic Double® combo with burger, medium drink, and Biggie® fries, moments after reading that these items add up to a monstrous 1,320 calories and 63 grams of fat, but only 8 grams of fiber? Likewise, advocacy groups like the Center for Science in the Public Interest want fast-food restaurants to stop using partially hydrogenated vegetable oil to cook french fries and other fried foods because the unhealthy trans fats in the oil significantly raise levels of LDL, the “bad” cholesterol. The problem, however, is that it costs $7 more to fill a fast-food fryer with trans fat-free oil. And that oil doesn’t last as long at the 350 degree cooking temperature, so it has to be replaced more often. Consequently, it would cost a Wendy’s restaurant $19,000 per year to get rid
What Would You Do?
of trans fats in its fried foods Another problem is that fries cooked in trans fat-free oils are soggier and less tasty. So, the question is what to do? Should Wendy’s pay attention to health food activists and attempt to forestall potential government regulations mandating healthier food by focusing healthier, lower calorie menu items as its competititor Subway is doing? At Subway, a six-inch roast beef sandwich with lettuce, tomatoes, onions, green peppers, pickles, olives, and fat-free honey mustard sauce contains just 320 calories and 5 grams of fat. Furthermore, Subway associates itself with the American Heart Association Heart Walks, and its advertising spokesperson, Jared Fogle, is famous for having lost 250 pounds by eating at Subway twice a day. Or should Wendy’s pay attention to what its customers traditionally want—the fast food, not healthy food? After all, the list of “healthy” fast-food items that have not sold well is very long: McDonald’s Lite Mac, McLean Deluxe, and McSalad Shakers; Wendy’s Light Menu; Burger King’s low-sodium pickles and veggie burger; and Taco Bell’s Border Lights. Furthermore, since Hardee’s introduced its Monster ThickSTUDY TIPS burger, a 1,420-calorie Create your own diagram of sandwich with 107 grams of fat the business environment and that comedian Jay Leno quipped “actually comes in a compare it to the example in little cardboard box shaped like the chapter. Read a selection a coffin,” same-store sales of articles in the business have jumped 6 percent. Finally, press and list the Wendy’s still faces potential environmental factors at play lawsuits from customers claiming that it was responsiin each of the articles. ble for their obesity and poor health. What, if anything, should Wendy’s do to protect itself against those lawsuits? If you were in charge at Wendy’s, what would you do?
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Wherever Wendy’s top managers look, they see changes and forces outside the company that threaten their ability to continue to make Wendy’s a successful business. This chapter examines the internal and external forces that affect companies. We begin by explaining how the changes in external organizational environments affect companies. Next, we examine the two kinds of external organizational environments: the general environment that affects all organizations and the specific environment unique to each company. Then, we learn how managers make sense of their changing general and specific environments. The chapter finishes with a discussion of internal organizational environments by focusing on organizational culture.
External Environments external environments
External environments are the forces and events outside a company that have the
All events outside a company that have the potential to influence or affect it.
potential to influence or affect it. Ask any adults what their favorite afterschool snack was, and they’ll tell you “milk and cookies.” But that’s not true today, as overall cookie sales, including Oreos and Chips Ahoy, have dropped for three straight years. Several trends in cookie companies’ external environments are behind this decline. As part of the fight against obesity, parents and school systems are replacing cookies with healthier alternatives, such as fruits and vegetables. Consequently, the Vista, California, school district stopped buying 28,000 chocolate chip cookies per month for its students. Also, thanks to microwaves, nobody bakes any more. Fifteen minutes to bake a batch of cookies seems an eternity. Indeed, the Quaker Oats annual baking contest attracts only half the entries it did a decade ago. Trying to reverse the decline, Kraft Foods has developed the Vanilla Oreo, which has no unhealthy trans fats, and small, prewrapped 100-calorie packages of Oreos and Chips Ahoy thin crisp cookies. Can the “cookie” be saved? Mike Senackerib of Kraft says, “I absolutely think we can revive the category.” It’s not a positive sign, however that for the last nine years, Elmo, and not the Cookie Monster, has been the most popular character on the children’s show Sesame Street.2
1 2 3 4
1
After reading the next four sections, you should be able to discuss how changing environments affect organizations. describe the four components of the general environment. explain the five components of the specific environment. describe the process that companies use to make sense of their changing environments.
CHANGING ENVIRONMENTS
Let’s examine the three basic characteristics of changing external environments: 1.1 environmental change, 1.2 environmental complexity, 1.3 resource scarcity, and 1.4 the uncertainty that environmental change, complexity, and resource scarcity can create for organizational managers.
1.1 Environmental Change environmental change The rate at which a company’s general and specific environments change.
stable environment An environment in which the rate of change is slow.
Environmental change is the rate at which a company’s general and specific environments change. In stable environments, the rate of environmental change
is slow. For instance, except for more efficient ovens, bread is baked, wrapped, and delivered fresh to stores each day much as it was decades ago. And although some new breads have become popular, the white and wheat breads that customers bought 20 years ago are still today’s best sellers. So, after two decades of consistent double-digit growth, Natural Ovens, which makes preservative-free
Chapter 3: Organizational Environments and Cultures
breads, spent $10 million to build a second baking facility. Soon after it was built, however, sales unexpectedly dropped. Said owner Paul Stitt, “We couldn’t figure out what was going on because we have been accustomed, on average, to having a 15 percent sales growth in each of the the last 25 years.” What happened? Thanks to the popularity of the Atkins diet plan, which advocates restricting carbohydrates, nationwide bread sales dropped for the first time in decades. Fortunately, the company adjusted to the first major change in its business in years by developing a very-difficult-to-bake low-carb bread, whose sales have increased from 1,200 to 60,000 loaves a week. Ironically, says Stitt, “We have a higher profit margin on our low-carb breads than on most of our other breads.”3 In contrast to Natural Ovens, which is in a stable environment, EA Sports competes in one of the most dynamic external environments—video games. In dynamic environments, the rate of environmental change is fast. EA Sports’ best-selling products are sports games like Madden NFL (football), NBA Live (basketball), NHL Hockey, Tiger Woods PGA Tour (golf), and FIFA Soccer. EA Sports’ business environment is dynamic because gaming technology changes so quickly. The company’s first product was designed for the Atari 800, one of the earliest computers designed to play computer games. The Atari 800, however, was soon replaced by the more powerful Commodore 64, which was then replaced by the Commodore Amiga, followed by the 8-bit Nintendo, the 16-bit Sega Genesis, the 32-bit and 64-bit Segas, Nintendos, Sony PlayStations, desktop computers, and now the Sony PlayStation2, the Nintendo Gamecube, and Microsoft’s Xbox. With development costs exceeding $10 million per game and marketing costs running as high as $15 million for some games, if EA sports develops unpopular games or guesses wrong and develops games for computer game boxes that will soon become obsolete, it could join the dozens of game companies that have already closed their doors.4 Although you might think that a company’s external environment would be either stable or dynamic, research suggests that companies often experience both. According to punctuated equilibrium theory, companies go through long, simple periods of stability (equilibrium), followed by short, complex periods of dynamic, fundamental change (revolutionary periods), finishing with a return to stability (new equilibrium).5 Exhibit 3.1 shows one example of punctuated equilibrium—the U.S. airline industry. Three times in the last 30 years, the U.S. airline industry has experienced revolutionary periods. The first, from mid-1979 to mid-1982, occurred immediately after airline deregulation in 1978. Prior to deregulation, the federal government controlled where airlines could fly, when they could fly, and the number of flights they could have on a particular route. After deregulation, these choices were left to the airlines. The large financial losses during this period clearly indicate that the airlines had trouble adjusting to the intense competition that occurred after deregulation. By mid-1982, however, profits returned to the industry and held steady until mid-1989. Then, after experiencing record growth and profits, U.S. airlines lost billions of dollars between 1989 and 1993 as the industry went through dramatic changes. Key expenses, including jet fuel and employee salaries, which had held steady for years, suddenly increased. Furthermore, revenues, which had grown steadily year after year, suddenly dropped because of dramatic changes in the airlines’ customer base. Business travelers, who typically pay full-priced fares, comprised more than half of all passengers during the 1980s. But now the largest customer base was leisure travelers who, unlike business travelers, wanted the cheapest flights they could get.6 With expenses suddenly up and revenues suddenly down, the airlines responded to these changes in their business environment by laying off 5 to 10 percent of their workers, canceling orders for new planes, and getting rid of routes that were not profitable. Starting in 1993
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dynamic environment An environment in which the rate of change is fast.
punctuated equilibrium theory A theory that holds that companies go through long, simple periods of stability (equilibrium), followed by short periods of dynamic, fundamental change (revolution), and ending with a return to stability (new equilibrium).
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Exhibit 3.1
1st RP: Deregulation of U.S. airline industry.
Punctuated Equilibrium: U.S. Airline Profits since 1979
U.S. Airline Industry
3rd RP: Following September 11 terrorist attack.
$15 Operating Profits
$5
2nd E: Followed by another period of RP: Rising industry stability. cost of jet fuel and employee salaries and benefits.
–$5
–$10
1996 1997 1998 1999 2000 2001 2002 2003
1990 1991 1992 1993 1994 1995
1987 1988 1989
1985 1986
1982 1983 1984
1980 1981
$0 Operating Losses
$ in Billions
$10
E: Followed by a period of industry stability.
RP: revolutionary period E: equilibrium
–$15 Year Source: “Annual Revenues and Earnings: U.S. Airlines—All Services,” Air Transport Association, [Online] available at http://www.airlines.org/econ/d.aspx?nid=1034, 15 January 2005.
and lasting till 1998, these changes helped profits return even stronger. The industry began to stabilize, if not flourish, just as punctuated equilibrium theory predicts.7 The third revolutionary period for the U.S. airline industry began with the terrorist attacks of September 11, 2001, in which planes were used as missiles to bring down the World Trade Center towers and damage the Pentagon. The immediate effect was a 20 percent drop in scheduled flights, a 40 percent drop in passengers, and losses so large that the U.S. government approved a $15 billion bailout to keep the airlines in business. Heightened airport security also affected airports, the airlines themselves, and airline customers. By 2005, United Airlines, U.S. Airways, Delta, and American Airlines had laid off an average of 25 percent of their workers to cut costs after losing a combined $20 billion.8 We can only hope that by the time you read this, the airline industry has moved through this revolutionary period of change back to a more stable period of equilibrium.
1.2 Environmental Complexity environmental complexity The number of external factors in the environment that affect organizations.
simple environment An environment with few environmental factors.
complex environment An environment with many environmental factors.
Environmental complexity is the number of external factors in the environment that affect organizations. Simple environments have few environmental factors, whereas complex environments have many environmental factors. For example,
the dairy industry has a relatively simple external environment. Except for advances in processing and automatic milking machines, which were made years ago, milk is produced the same way today as it was 100 years ago. And, while food manufacturers introduce dozens of new dairy-based products each year, U.S. milk production has grown a meager 1.25 percent per year over the last decade. In short, producing milk is a highly competitive, but simple business that has experienced few changes.9 By contrast, in recent years, breakfast cereal companies like Kellogg’s have found themselves in a more complex environment in which three significant changes have occurred. The first is that these companies now face more competition.10 Twenty years ago, Kellogg’s competed against just a few cereal companies, such as General Mills and Post. Today, Kellogg’s competes against those companies, plus a dozen more private-label store brands (IGA, Good
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Value, etc.) and health food brands (Healthy Valley and Kashi). Furthermore, with more people eating breakfast on the run, a much smaller percentage of people eat cereal for breakfast. Consumer Jeannie Hutosky, of Grand Rapids, Michigan, where Kellogg is headquartered, says, “My husband likes Kellogg cereals. But he tends to eat granola bars and bagels on the way to work.”11 Indeed, sales of breakfast and snack bars now total $1.5 billion a year.12 The second significant change in the cereal industry has been price cuts. For years, Kellogg’s made gross profits of 50 percent on a box of cereal. In other words, it cost Kellogg’s only $2.50 to make a $5.00 box of cereal. Yet, with profits that high, private-label store brands could still make a profit of $1.00 per box by slashing the price to $3.50 per box of cereal. The third significant change has been the entrance of Wal-Mart into the grocery business. Wal-Mart, much more than other national grocery chains, relies on cheaper private-label store brands like its own Sam’s Choice soft drinks and Ol’ Roy dog food. Consumers like these products because they cost substantially less than brand-name products. So, as Wal-Mart aggressively expanded into the grocery business and pushed its cheaper, private-label cereals, Kellogg’s saw its market share drop even more. Together, these changes have made Kellogg’s external environment much more complex than it used to be.13
1.3 Resource Scarcity
abundance or scarcity of critical organizational resources. For example, the primary reason that flat-screen, LCD (liquid crystal display) televisions with lifelike pictures are six times more expensive per inch than regular TVs, two times more expensive than rear projection TVs, and 25 percent more expensive than plasma TVs is that there aren’t enough LCD screen factories to meet demand. Without more factories, LCD TV prices will remain high. At $2 billion to $3 billion each, LCD factories are the scarce resource in this industry. LCD factories are expensive to build because, like computer chips, LCD flat screens must be made in superclean environments. Furthermore, the manufacturing process is complex and difficult to manage because the liquid crystal, which can be ruined by just one speck of dust, must be poured onto glass in a layer thinner than a piece of paper. Another problem is that most factories produce LCD glass panels that are only 43 inches by 49 inches. Each of these panels can be cut into one dozen 17-inch LCD screens for computer monitors, but just two 30-inch LCD screens for TVs. Only Sharp has a factory that can produce 59-by71-inch LCD glass panels that can be cut into as many as eight 32-inch or six 37-inch screens for TVs.14 To address these shortages, LCD manufacturers plan to build 12
COURTESY OF WEYERHAEUSER COMPANY
The third characteristic of external environments is resource scarcity. Resource scarcity is the degree to which an organization’s external environment has an
resource scarcity The degree to which an organization’s external environment has an abundance or scarcity of critical organizational resources.
There is general concern over the scarcity of natural resources, so companies like Weyerhauser have to work extra hard to correct the misperception that they are "using up" valuable resources. In fact, through careful planning and good management, Weyerhauser is able to both guarantee its lumber resources and be a good environmental steward.
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Environmental Uncertainty
Exhibit 3.2 Environmental Change, Environmental Complexity, and Resource Scarcity
High When environmental change and complexity are at high levels and resource scarcity is high (i.e., resources are scarce), uncertainty is high, and managers may not be at all confident that they can understand, predict, and handle the external forces affecting their businesses.
Medium
When environmental change and complexity are at low levels and resource scarcity is small (i.e., resources are plentiful), uncertainty is low, and managers feel confident that they can understand, predict, and react to the external forces that affect their businesses.
Low
Environmental Complexity Environmental Change Resource Scarcity
Environmental Characteristics
new factories in the next two years at a total cost of between $15 billion and $20 billion.
1.4 Uncertainty uncertainty The extent to which managers can understand or predict which environmental changes and trends will affect their businesses.
As Exhibit 3.2 shows, environmental change, environmental complexity, and resource scarcity affect environmental uncertainty, which is how well managers can understand or predict the external changes and trends affecting their businesses. Starting at the left side of the figure, environmental uncertainty is lowest when environmental change and environmental complexity are at low levels and resource scarcity is small (i.e., resources are plentiful). In these environments, managers feel confident that they can understand, predict, and react to the external forces that affect their businesses. By contrast, the right side of the figure indicates that environmental uncertainty is highest when environmental change and complexity are extensive and resource scarcity is a problem. In these environments, managers may not be at all confident that they can understand, predict, and handle the external forces affecting their businesses.
Review 1: Changing Environments Environmental change, complexity, and resource scarcity are the basic components of external environments. Environmental change is the rate at which conditions or events affecting a business change. Environmental complexity is the number of external factors in an external environment. Resource scarcity is the scarcity or abundance of resources available in the external environment. The greater the rate of environmental change, environmental complexity, and resource scarcity, the less confident managers are that they can understand, predict, and effectively react to the trends affecting their businesses. According to punctuated equilibrium theory, companies experience periods of stability followed by short periods of dynamic, fundamental change, followed by a return to periods of stability. 2 general environment The economic, technological, sociocultural, and political trends that indirectly affect all organizations.
GENERAL ENVIRONMENT
As Exhibit 3.3 shows, two kinds of external environments influence organizations: the general environment and the specific environment. The general environment consists of the economy and the technological, sociocultural, and political/legal trends that indirectly affect all organizations. Changes in any sector of the general environment eventually affect most organizations. For example, when
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RAL ENVIRONMEN T GENE
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the Federal Reserve lowers its prime lending rate, most businesses benefit because banks and credit card companies often lower the interest rates they charge for loans. Consumers, who can then borrow money more cheaply, will borrow more to buy homes, cars, refrigerators, and plasma or LCD large-screen TVs. By contrast, each organization also has a specific environment that is unique to that firm’s industry and directly affects the way it conducts day-to-day business. For example, when the cost of coffee beans increased dramatically, Starbucks increased its prices, as did Kraft Foods, the maker of Maxwell House coffee.15 But, because that change came from the specific environment for this industry and not the general environment (which influences all businesses), only coffee-related businesses were affected. The specific environment, which will be discussed in detail in Section 3 of this chapter, includes customers, competitors, suppliers, industry regulation, and advocacy groups. Let’s take a closer look at the four components of the general environment: 2.1 the economy, and 2.2 the technological, 2.3 sociocultural, and 2.4 political/legal trends that indirectly affect all organizations.
2.1 Economy The current state of a country’s economy affects most organizations operating in it. In general, in a growing economy, more people are working and therefore have relatively more money to spend. More products are bought and sold than in a static or shrinking economy. Though an individual firm’s sales will not necessarily increase, a growing economy does provide an environment favorable to business growth. In contrast, in a shrinking economy, consumers have less money to spend, and relatively fewer products are bought and sold. Thus, a shrinking economy makes growth for individual businesses more difficult.
Exhibit 3.3 General and Specific Environments
specific environment The customers, competitors, suppliers, industry regulations, and advocacy groups that are unique to an industry and directly affect how a company does business.
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business confidence indices Indices that show managers’ level of confidence about future business growth.
Because the economy influences basic business decisions, such as whether to hire more employees, expand production, or take out loans to purchase equipment, managers scan their economic environments for signs of change. Unfortunately, the economic statistics that managers rely on when making these decisions are notoriously poor predictors of future economic activity. A manager who decides to hire 10 more employees because economic data suggest future growth could very well have to lay off those newly hired workers when the economic growth does not occur. In fact, a famous economic study found that at the beginning of a business quarter (a period of only three months), even the best economic forecasters could not accurately predict whether economic activity would grow or shrink in that same quarter!16 Because economic statistics can be poor predictors, some managers try to predict future economic activity by keeping track of business confidence. Business confidence indices show how confident actual managers are about future business growth. For example, the Fortune Business Confidence Index is a monthly survey of chief financial officers at large Fortune 1000 firms.17 Another widely cited measure is the U.S. Chamber of Commerce Business Confidence Index, which asks 7,000 small business owners to express their optimism (or pessimism) about future business sales and prospects. Managers often prefer business confidence indices to economic statistics because they know that other managers make business decisions that are in line with their expectations concerning the economy’s future. So, if the Fortune or U.S. Chamber of Commerce Business Confidence Indices are dropping, a manager would think hard about hiring new employees, increasing production, or taking out additional loans to expand the business.
2.2 Technological Component technology
Technology is the knowledge, tools, and techniques used to transform inputs
The knowledge, tools, and techniques used to transform input into output.
(raw materials, information, etc.) into outputs (products and services). For example, the knowledge of authors, editors, and artists (technology) and the use of equipment like computers and printing presses (also technology) transformed paper, ink, and glue (raw material inputs) into this book (the finished product). In the case of a service company such as an airline, the technology consists of equipment, including airplanes, repair tools, and computers, and the knowledge of mechanics, ticketers, and flight crews. The output is the service of transporting people from one place to another. Changes in technology can help companies provide better products or produce their products more efficiently. For example, advances in surgical techniques and imaging equipment have made open-heart surgery much faster and safer in recent years. While technological changes can benefit a business, they can also threaten it. For example, now that more than 400 million songs can be downloaded for free at Kazaa.com alone (the largest music file swapping Web site), it’s no surprise that sales of music CDs have dropped 25 percent over the last four years, though sales of blank CDs are up 40 percent.18 British college student Dave Watson says, “You’d be hard-pressed to find a group of students who’ve never downloaded music. You can’t stop them, as long as it’s free.”19 How extensive is this technological threat to the music industry? When a Wired magazine reporter logged on to Kazaa on a quiet Monday morning, he found at least a hundred copies of each song on the Billboard 100 and 13 of the 15 songs on Mariah Carey’s new CD, which hadn’t even been released to the public.20 Companies must embrace new technology and find effective ways to use it to improve their products and services or decrease costs. If they don’t, they will lose out to those that do. Chapter 7, on organizational change and innovation, provides a more in-depth discussion of how technology affects a company’s competitive advantage.
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2.3 Sociocultural Component The sociocultural component of the general environment refers to the demographic characteristics and general behavior, attitudes, and beliefs of people in a particular society. Sociocultural changes and trends influence organizations in two important ways. First, changing demographic characteristics, such as the number of people with particular skills or the growth or decline in particular population segments (single or married; old or young; men or women; Caucasians, Hispanics, African Americans, or Asian Americans, etc.), affect how companies run their businesses. For example, as Exhibit 3.4 shows, married women with children are much more likely to work today than four decades ago. In 1960, only 18.6 percent of women with children under 6 years old and 39 percent of women with children between the ages of 6 and 17 worked. In 2003, those percentages had risen to 59.8 percent and 77 percent, respectively. Today, with traffic congestion creating longer commutes and both parents working longer hours, employees are much more likely to value products and services that allow them to recapture free time with their families. Priscilla La Barbera, a marketing professor at New York University, believes that there’s been a “societal shift” in the way people view their free time. She says, “People are beginning to realize that their time has real value.”21 Companies such as CDW (Computer Discount Warehouse) in Vernon, Illinois, help their employees by providing a service that picks up their dry cleaning at their desks.22 At First Command Financial Planning in Fort Worth, Texas, employees can borrow movies for two nights of home viewing and drop off shoes for free shining and their cars for free washing.23 Circles, an organization that provides employee concierge services for 50 companies, helps employees find more free time by planning their vacations or running their errands.24 Second, sociocultural changes in behavior, attitudes, and beliefs also affect the demand for a business’s products and services. Because more women with Exhibit 3.4 Demographics: Percentage of Married Women (with Children) Who Work
% of Married Women (with Children) Who Work
90.0% 80.0% 70.0%
Married women with children are much more likely to work today than four decades ago. In 1960, only 18.6 percent of women with children under 6 years old and 39 percent of women with children between the ages of 6 and 17 worked. In 2003, those percentages had risen to 59.8 percent and 77 percent, respectively. Sociocultural changes like this affect the demand for products and services. Consequently, today’s harried worker/parents can hire baby-proofing agencies (to baby-proof their homes), emergency babysitting services, bill payers, birthday party planners, kiddie taxi services, personal assistants, and personal chefs.
77.2
76.2 68.0 63.5
62.0
62.8 59.8
58.9
60.0%
77.0
73.6
53.4 49.2
50.0%
45.1 39.0
40.0% 30.3
30.0% 20.0%
18.6
10.0% 0.0% 1960
1970
1980
1985
Children under 6
1990
1995
2000
2003
Children 6 to 17
Sources: U.S. Census Bureau, Statistical Abstract of the United States, 1999, 2001, and 2004-2005. (Washington, D.C.: U.S. Government Printing Office, 1999, 2001, and 2004), “Employment Status of Women by Marital Status and Presence and Age of Children: 1960 to 1998,” Table No. 631; “Employment Status of Women by Marital Status and Presence and Age of Children: 1970 to 2003,” Table No. 579.
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children are in the workforce, families are deliberately selective about how they spend their free time. Two mothers from Sacramento were tired of running around town trying to find unique supplies for their children’s birthday parties (and finding only Barney, Barbie, and Disney characters), so they started Original Party Box, a service that sends out a box full of everything you need for a kid’s birthday party: invitations, ribbons, plates, napkins, confetti, games, prizes, goodie bags, and even a cake pan. Instead of driving from store to store, parents can spend their time decorating the house and baking.25 Today’s harried worker/parents may have more than one child to shuttle back and forth between karate, soccer, ballet, and art classes. Services like Original Party Box let parents extract more value from their increasingly limited free time, which is a result of the sociocultural changes associated with a much higher percentage of women in the workplace.
2.4 Political/Legal Component The political/legal component of the general environment includes the legislation, regulations, and court decisions that govern and regulate business behavior. In recent years, new laws and regulations have imposed additional responsibilities on companies. Unfortunately, many managers are unaware of these new responsibilities. For example, under the 1991 Civil Rights Act (http://www.eeoc.gov/ policy/cra91.html), if an employee is sexually harassed by anyone at work (a supervisor, a coworker, or even a customer), the company—not just the harasser—is potentially liable for damages, attorneys’ fees, and back pay.26 Under the Family and Medical Leave Act (http://www.dol.gov/esa/whd/fmla/), employees who have been on the job one year are guaranteed 12 weeks of unpaid leave per year to tend to their own illnesses or to their elderly parents, a newborn baby, or a newly adopted child. Employees are guaranteed the same job, pay, and benefits when they return to work.27 Many managers are also unaware of the potential legal risks associated with traditional managerial decisions like recruiting, hiring, and firing employees. Increasingly, businesses and managers are being sued for negligent hiring and supervision, defamation, invasion of privacy, emotional distress, fraud, and misrepresentation during employee recruitment.28 More than 24,000 suits for wrongful termination (unfairly firing employees) are filed each year.29 In fact, wrongful termination lawsuits increased by 77 percent in the last decade and now account for 13 percent of all lawsuits against companies.30 One in four employers is eventually sued for wrongful termination. Employers lose 70 percent of these cases, and on average, the former employee is awarded $500,000 or more.31 Companies also face potential legal risks from customer-initiated lawsuits. For example, under product liability law, manufacturers can be liable for products made decades ago. Also, the law, as it is now written, does not consider whether manufactured products have been properly maintained and used. For instance, a Texas jury awarded $37 million in damages against Goodyear Tire Company after concluding that one of its tires caused a traffic death. The tire to which the jury attributed the death was nine years old, nearly twice the normal four- to five-year “life span” of most tires, and had been patched four times (once incorrectly).32 Still, the jury required Goodyear Tire to pay $37 million in damages. Why? Under product liability law, plaintiffs only have to demonstrate that they were injured by the manufacturer’s product. In turn, under the concept of “strict liability,” the burden of proof is shifted to the company, which must prove that the product was safe.33 Thus, once injuries have been shown, the company is assumed guilty until it proves its innocence. Today, jury verdicts in product liability cases cost companies an average of $6.8 million per case.34 Not everyone agrees that companies face severe legal risks. Indeed, many believe that the government should do more to regulate and restrict business
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behavior and that it should be easier for average citizens to sue dishonest or negligent corporations. From a managerial perspective, the best medicine against legal risk is prevention. As a manager, it is your responsibility to educate yourself about the laws, regulations, and potential lawsuits that could affect your business. Failure to do so may put you and your company at risk of sizable penalties, fines, or legal charges.
Review 2: General Environment The general environment consists of economic, technological, sociocultural, and political/legal events and trends that affect all organizations. Because the economy influences basic business decisions, managers often use economic statistics and business confidence indices to predict future economic activity. Changes in technology, which is used to transform inputs into outputs, can be a benefit or a threat to a business. Sociocultural trends, like changing demographic characteristics, affect how companies run their businesses. Similarly, sociocultural changes in behavior, attitudes, and beliefs affect the demand for a business’s products and services. Court decisions and new federal and state laws have imposed much greater political/legal responsibilities on companies. The best way to manage legal responsibilities is to educate managers and employees about laws and regulations and potential lawsuits that could affect a business. 3
SPECIFIC ENVIRONMENT
As you just learned, changes in any sector of the general environment (economy, technological, sociocultural, and political/legal) eventually affect most organizations. By contrast, each organization also has a specific environment that is unique to that firm’s industry and directly affects the way it conducts day-today business. For example, if customers decide to use another product, or a competitor cuts prices 10 percent, or a supplier can’t deliver raw materials, or federal regulators mandate reductions in industry pollutants, or environmental groups accuse your company of selling unsafe products, the impact from the specific environment on your business is immediate. Let’s examine how the 3.1 customer, 3.2 competitor, 3.3 supplier, 3.4 industry regulation, and 3.5 advocacy group components of the specific environment affect businesses.
3.1 Customer Component Customers purchase products and services. Companies cannot exist without customer support. Therefore, monitoring customers’ changing wants and needs is critical to business success. There are two basic strategies for monitoring customers: reactive and proactive. Reactive customer monitoring is identifying and addressing customer trends and problems after they occur. One reactive strategy is to identify customer concerns by listening closely to customer complaints. This strategy involves not only listening to complaints, but also responding to them in a way that indicates the company is attending closely to customer concerns. For example, companies that respond quickly to customer letters of complaint are viewed much more favorably than companies that are slow to respond or never respond.35 In particular, studies have shown that when a company’s follow-up letter thanks the customer for writing, offers a sincere, specific response to the complaint (i.e., not a form letter, but an explanation of how the problem will be handled), and contains a small gift, coupons, or a refund to make up for the problem, customers are much more likely to purchase products or services again from that company.36 By contrast, companies that don’t respond promptly to customer complaints are likely to find customer rants and tirades posted
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publicly on places like http://www.planetfeedback.com. Customers hope that posting complaints on these sites will force someone to address their problems. It worked for Lena West. The day after she posted a complaint against Budget Rent-a-Car, she received an email containing an apology and a promise to solve her problem.37 Proactive monitoring of customers means identifying and addressing customer needs, trends, and issues before they occur. For example, over the next few years more stores that sell toys will offer electronic gift cards—not gift certificates, but gift cards—that are preprogrammed with a dollar amount and are “swiped” like credit cards. With kids’ bedrooms stuffed with toys, savvy retailers have noticed that parents and grandparents would rather give gift cards, so they don’t have to worry about getting the wrong toy or a toy that the kids already have.38 Another example of proactive monitoring is the fast-food industry’s use of multibranding, in which two or more food chains share space under the same roof. Multibranding brings in more customers by giving them more choice. Yum! Brands, which often pairs Taco Bell with Kentucky Fried Chicken, finds that sales are one-third higher in multibrand restaurants than in traditional single-brand restaurants.39
3.2 Competitor Component competitors Companies in the same industry that sell similar products or services to customers.
competitive analysis A process for monitoring the competition that involves identifying competitors, anticipating their moves, and determining their strengths and weaknesses.
Competitors are companies in the same industry that sell similar products or services to customers. General Motors, Ford, and DaimlerChrysler all compete for automobile customers. NBC, ABC, CBS, and Fox compete for TV viewers’ attention. And McDonald’s, Burger King, and Wendy’s compete for fast-food customers’ dollars. Often the difference between business success and failure comes down to whether your company is doing a better job of satisfying customer wants and needs than the competition. Consequently, companies need to keep close track of what their competitors are doing. To do this, managers perform a competitive analysis, which involves deciding who your competitors are, anticipating competitors’ moves, and determining competitors’ strengths and weaknesses. Surprisingly, managers often do a poor job of identifying potential competitors because they tend to focus on only two or three well-known competitors with similar goals and resources.40 For example, Coke and Pepsi undoubtedly spend more time keeping track of each other than they spend on Dr. Pepper or Snapple. Xerox, which touts itself as “the document company,” meaning copiers, printers, fax machines, and scanners, focused on its largest competitors in the copying business, Canon and Ricoh. By doing so, however, it ignored Hewlett-Packard’s inkjet printers and lost billions in sales in the small office, home office (SOHO) market. When the popularity of inkjet printers exploded over the last 10 years, HP’s highly profitable printer division grew until it is now larger than all of Xerox.41 Another mistake managers may make when analyzing the competition is to underestimate potential competitors’ capabilities. When this happens, managers don’t take the steps they should to continue to improve their products or services. The result can be significant decreases in both market share and profits. For nearly a decade, traditional phone companies ignored the threat to their business from VOIP (voice over Internet protocol), that is, the ability to make telephone calls over the Internet. Early on, software products like Cool Talk, Internet Phone, and Web Phone made it possible to make inexpensive longdistance phone calls on the Internet. All you needed was an Internet service provider; a computer with a sound card, speakers, and a microphone; and Internet phone software. The sound quality was only as good as AM radio, but people who were used to poor-quality sound on their cell phones didn’t care because the calls were so much cheaper.42
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Today, because phone companies were slow to adopt VOIP capabilties themselves, they’re facing a rash of new, unexpected VOIP competitors, all of which plan to slash prices and take market share using high-speed Internet service connections to people’s homes. For example, Comcast, a cable TV provider that also provides high-speed Internet service, plans to roll out Internet phone service to 40 million U.S. homes over the next two years.43 In Hong Kong, City Telecom, which has built a fiber optic network throughout the province, charges only $38 a month for phone service, high-speed Internet, and cable TV (delivered over fiber optic cables).44 Most U.S. consumers pay four to five times that much per month for the same services. Vonage, http://www. vonage.com, an Internet phone company, charges just $24.95 per month (maybe less by the time you read this) for unlimited calls in the United States and Canada. Its international long-distance charges are typically no more than three to six cents per minute. How much of a threat is Internet phone service to traditional phone companies today? Jeff Pulver, CEO of Pulver.com, which owns Free World Dialup, an Internet phone company, says, “Within the next 10 years, it’s quite possible that 50 percent or more of voice traffic will take place off the traditional public telephone network and run on the Internet wireless or other systems.”45
3.3 Supplier Component
DIAMOND INFORMATION CENTER
Suppliers are companies that provide material, human, financial, and informational resources to other companies. U.S. Steel buys iron ore from suppliers to make steel products. When IBM sells a mainframe computer, it also provides support staff, engineers, and other technical consultants to the company that bought the computer. If you’re shopping for desks, chairs, and office supplies, chances are Office Depot will be glad to help your business open a revolving charge account to pay for your purchases. Or, when a clothing manufacturer has spent $100,000 to purchase new high-pressure “water drills” to be used to cut shirt and pants patterns to precise sizes, the water drill manufacturer will, as part of the purchase, agree to train workers to use the machinery. A key factor influencing the relationship between companies and their suppliers is how dependent they are on each other.46 Supplier dependence is the degree to which a company relies on a supplier because of the importance of the supplier’s product to the company and the difficulty of finding other sources of that product. Supplier dependence is very strong in the diamond business, given that De Beers Consolidated Mines provides 66 percent of the wholesale diamonds in the world. De Beers has dominated the diamond industry for more than a century, controlling the supply, price, and quality of the best diamonds on the market. The company’s 125 customers, or “sightholders,” as they’re known in the industry, are summoned to De Beers’ London office 10 times a year and given a shoebox of diamonds that they have to buy. If they refuse, they lose the opportunity to purchase any more diamonds. DeBeers has started a Supplier of Choice
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suppliers Companies that provide material, human, financial, and informational resources to other companies.
supplier dependence The degree to which a company relies on a supplier because of the importance of the supplier’s product to the company and the difficulty of finding other sources of that product.
Historically, the diamond industry was structured like a pyramid, with myriad small and medium businesses forming a broad base to support the larger companies, like De Beers. Those businesses focused mostly on diamond cutting and wholesaling and were unable to meet De Beers requirements for developing and implement new marketing and advertising campaigns, like the one shown here.
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buyer dependence The degree to which a supplier relies on a buyer because of the importance of that buyer to the supplier’s sales and the difficulty of finding other buyers for its products.
opportunistic behavior A transaction in which one party in the relationship benefits at the expense of the other.
relationship behavior Mutually beneficial, long-term exchanges between buyers and suppliers.
(SoC) program that requires sightholders to pay more of the marketing, advertising, and branding costs for De Beers diamonds. SoC sightholders sign twoyear contracts that spell out their responsibilities to develop marketing plans and advertising initiatives and to adhere to ethical guidelines. Just two-thirds of De Beers sightholders, however, qualified as SoCs. The one-third who didn’t qualify as SoCs are no longer permitted to sell De Beers diamonds and must now get their diamonds from less prestigous diamond suppliers.47 Buyer dependence is the degree to which a supplier relies on a buyer because of the importance of that buyer to the supplier’s sales and the difficulty of finding other buyers of its products. For example, Superior Industries International, which makes car wheels, gets 85 percent of its $840 million in sales from Ford and General Motors. When the two auto makers demanded that Superior match the low prices that Chinese wheel suppliers were offering, it had little choice. Superior’s president Steve Borick said that the ultimatum was presented very simply. “This is the price we are getting [from Chinese suppliers] for this product. You either match that, or we’ll take our business to them.” Said Borick, “It’s that black and white. Close the [cost] gap [of 20 to 40 percent] no matter how” you do it.48 As the De Beers and Superior Industries examples show, a high degree of buyer or seller dependence can lead to opportunistic behavior, in which one party benefits at the expense of the other. Though opportunistic behavior between buyers and suppliers will never be completely eliminated, many companies believe that both buyers and suppliers can benefit by improving the buyer-supplier relationship.49 In contrast to opportunistic behavior, relationship behavior focuses on establishing a mutually beneficial, long-term relationship between buyers and suppliers.50 For example, Toyota is well known for developing positive long-term relationships with its key suppliers. Donald Esmond, who runs Toyota’s U.S. division, says, “I think what they [i.e., suppliers] appreciate . . . is we don’t go in and say, ‘Reduce the costs by 6 percent; if you don’t, somebody else is going to get the business.’ We go in and say we want to come in and help you [figure out] where you can save costs so we can reduce our overall price. So it’s a different approach.”51
3.4 Industry Regulation Component industry regulation Regulations and rules that govern the business practices and procedures of specific industries, businesses, and professions.
Whereas the political/legal component of the general environment affects all businesses, the industry regulation component consists of regulations and rules that govern the practices and procedures of specific industries, businesses, and professions. For example, if your neighbor decides to make a little extra money selling homemade baked goods and sells you two apple pies, your neighbor could be fined. In most states, it is illegal to sell food from your home. State regulations typically require a food business to obtain a license and a state certificate of inspection that indicates that the food is stored properly; insects have not infested the premises; ovens are state approved; electrical wiring, lighting, and smoke detectors are up to code; and so on.52 Likewise, the auto industry is subject to CAFE (Corporate Average Fuel Economy) regulations that require cars and sports utility vehicles to average 27.5 and 20.5 miles, respectively, per gallon.53 Regulatory agencies affect businesses by creating and enforcing rules and regulations to protect consumers, workers, or society as a whole. For example, the U.S. Department of Agriculture and the Food and Drug Administration regulate the safety of seafood (and meat and poultry) through the science-based Hazard Analysis and Critical Control Points (HACCP) program. Seafood processors are required to identify hazards (toxins, chemicals, pesticides, and decomposition) that could cause the fish they process to be unsafe. They must also establish critical control points to control hazards both inside and outside their fish-processing plants and then establish monitoring, corrective action, and verification procedures to certify that the fish they process is safe to consume.54
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3.5 Advocacy Groups Advocacy groups are groups of concerned citizens who band
DEALING WITH GIFTS AND SUPPLIERS In hopes of getting a buyer’s business or getting more business, suppliers sometimes offer buyers trips to exotic locations, dinners at expensive restaurants, or expensive gifts. Excessive gift giving and receiving creates a conflict of interest between what’s best for the company (purchasing items of the best quality and cost) and what’s personally best for the buyer who receives the gifts. Follow these general guidelines to avoid conflicts of interest: • Remember that there is no such thing as a free lunch. • Make sure that business meals and entertainment (parties, outings, sporting events) have a valid business purpose and that the buyer and the supplier take turns paying for or hosting them. • Don’t accept gifts worth more than $25 in value. If you are offered a gift worth more than $25, report it to your manager who can decide whether it is appropriate to keep the gift. • Never accept cash or cash equivalents, such as gift certificates. • Don’t accept discounts on goods and services, unless they are generally available to others. • Don’t accept offers of stock in suppliers’ companies. • Don’t allow personal friendships with suppliers to influence buying decisions. 58
together to try to influence the business practices of specific industries, businesses, and professions. The members of a group generally share the same point of view on a particular issue. For example, environmental advocacy groups might try to get manufacturers to reduce smokestack pollution emissions. Unlike the industry regulation component of the specific environment, advocacy groups cannot force organizations to change their practices. Nevertheless, they can use a number of techniques to try to influence companies: public communications, media advocacy, and product boycotts. The public communications approach relies on voluntary participation by the news media and the advertising industry to send out an advocacy group’s message. For example, a public service campaign to encourage people to quit smoking ran the following ads in newspapers and magazines throughout Europe: a photo showing the foot of a young person with a toe tag (indicating the person was dead), with the caption, “Smokers die younger”; a picture showing clean lungs next to brown and black stained lungs, with the caption, “Smoking causes fatal lung cancer”; and, photo of a baby in an intensive care unit hooked up to a respirator, with the caption, “Smoking when pregnant harms your baby.”59 Media advocacy is much more aggressive than the public communications approach. A media advocacy approach typically involves framing issues as public issues (affecting everyone); exposing questionable, exploitative, or unethical practices; and obtaining media coverage by buying media time or creating controversy that is likely to receive extensive news coverage. PETA (People for the Ethical Treatment of Animals), which has offices in Virginia, England, Italy, and Germany, uses controversial publicity stunts and advertisements to try to change the behavior of large organizations, fashion designers, medical researchers, and anyone else it believes is hurting or mistreating animals. PETA’s cofounder and president Ingrid Newkirk says, “People now know that if they do something ghastly to an animal, they can’t necessarily get away with it. When we started, nobody knew what animal rights meant. . . . Now, it’s an issue.” PETA protesters have stripped naked in front of the White House in front of a banner saying, “I’d rather go naked than wear fur.” From PETA’s perspective, any animal-based product is bad. In one of its latest protests, PETA distributed 2,000 blood-covered, knife-holding, “evil Colonel Sanders” bobblehead dolls to news organizations and KFC restaurants. PETA spokesman
HE R IGHT T G T H I IN NG DO
The nearly 100 federal agencies and regulatory commissions can affect almost any kind of business. Exhibit 3.5 lists some of the most influential federal agencies and commissions, as well as their responsibilities and their Web sites. Overall, the number and cost of federal regulations has nearly tripled in the last 25 years. Today, for every $1 the federal government spends creating regulations, businesses spend $45 to comply with them.55 In addition to federal regulations, businesses are also subject to state, county, and city regulations. Complying with all of these regulations costs businesses an estimated $189 billion per year or $1,700 per employee.56 Surveys indicate that managers rank dealing with government regulation as one of the most demanding and frustrating parts of their jobs.57
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advocacy groups Groups of concerned citizens who band together to try to influence the business practices of specific industries, businesses, and professions.
public communications An advocacy group tactic that relies on voluntary participation by the news media and the advertising industry to get an advocacy group’s message out.
media advocacy An advocacy group tactic that involves framing issues as public issues; exposing questionable, exploitative, or unethical practices; and forcing media coverage by buying media time or creating controversy that is likely to receive extensive news coverage.
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Federal Agency
Regulatory Responsibilities
Consumer Product Safety Commission http://www.cpsc.gov/
Reduces risk of injuries and deaths associated with consumer products, sets product safety standards, enforces product recalls, and provides consumer education Collects employment statistics and administers labor laws concerning safe working conditions, minimum hourly wages and overtime pay, employment discrimination, and unemployment insurance Reduces and controls pollution through research, monitoring, standard setting, and enforcement activities Promotes fair hiring and promotion practices
Department of Labor http://www.dol.gov Environmental Protection Agency http://www.epa.gov/ Equal Employment Opportunity Commission http://www.eeoc.gov/ Federal Communications Commission http://www.fcc.gov/ Federal Reserve System http://www.federalreserve.gov/ Federal Trade Commission http://www.ftc.gov/ Food and Drug Administration http://www.fda.gov/ National Labor Relations Board http://www.nlrb.gov/ Occupational Safety and Health Administration http://www.osha.gov/ Securities and Exchange Commission http://www.sec.gov/
Regulates interstate and international communications by radio, television, wire, satellite, and cable As nation’s central bank, controls interest rates and money supply, and monitors the U.S. banking system to produce a growing economy with stable prices Restricts unfair methods of business competition and misleading advertising, and enforces consumer protection laws Protects nation’s health by making sure food, drugs, and cosmetics are safe Monitors union elections and stops companies from engaging in unfair labor practices Saves lives, prevents injuries, and protects the health of workers Protects investors in the bond and stock markets, guarantees access to information on publicly traded securities, and regulates firms that sell securities or give investment advice
Exhibit 3.5 Federal Regulatory Agencies and Commissions
product boycott An advocacy group tactic that involves protesting a company’s actions by convincing consumers not to purchase its product or service.
Joe Hinkle says, “We’d like them to stop breeding and drugging chickens so that they grow so big that they actually cripple under their own bulk.” KFC issued this response: “PETA has disparaged our brand and misrepresented the truth about our responsible industry-leading animal welfare standards. KFC is committed to the humane treatment of chickens.”60 A product boycott is a tactic in which an advocacy group actively tries to convince consumers not to purchase a company’s product or service. The advocacy group Ecopledge.com has signed up 150,000 college students online, all of whom have agreed to boycott organizations that don’t respond to their demands. Ecopledge.com, which gives each company one year to make changes and then calls for a boycott, has had success in getting Staples, the office product superstore, to agree not to sell products from endangered forests and to make sure that 30 percent of the paper products it sells are recycled.61 It also convinced Dell, Inc. to recycle the old electronic and computer equipment of customers who buy new products from Dell.62 Ecopledge.com is now trying to get the Hertz rental car company to purchase small, gas-efficient cars so that the average fuel economy of its rental fleet will be 40 miles per gallon by 2012.63
Review 3: Specific Environment The specific environment is made up of five components: customers, competitors, suppliers, industry regulation, and advocacy groups. Companies can monitor customers’ needs by identifying customer problems after they occur or by anticipating problems before they occur. Because they tend to focus on well-known competitors, managers often underestimate their competition or do a poor job of identifying future competitors. Suppliers and buyers are very dependent on each other, and that dependence sometimes leads to opportunistic behavior, in which
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one benefits at the expense of the other. Regulatory agencies affect businesses by creating rules and then enforcing them. Overall, the level of industry regulation has nearly tripled in the last 25 years. Advocacy groups cannot regulate organizations’ practices. Nevertheless, through public communications, media advocacy, and product boycotts, they try to convince companies to change their practices. 4
MAKING SENSE OF CHANGING ENVIRONMENTS
In Chapter 1, you learned that managers are responsible for making sense of their business environments. As our discussions of the general and specific environments have indicated, however, making sense of business environments is not an easy task. Because external environments can be dynamic, confusing, and complex, managers use a three-step process to make sense of the changes in their external environments: 4.1 environmental scanning, 4.2 interpreting environmental factors, and 4.3 acting on threats and opportunities
4.1 Environmental Scanning Environmental scanning is searching the environment for important events or issues that might affect an organization. Managers scan the environment to stay up-to-date on important factors in their industry. For example, with one out of every four new car buyers purchasing highly profitable sports utility vehicles (SUVs), auto executives haven’t paid much attention to environmental groups’ complaints about SUVs’ extremely poor gas mileage. Now, however, with market research showing that current SUV owners are unhappy with their vehicles’ poor gas mileage, especially as gas prices increase, and that potential car buyers in their teens and 20s are beginning to express strong disapproval of SUVs as well, auto executives are beginning to pay attention—because their sales and profits could be affected. James Schroer, DaimlerChrysler’s executive vice president for sales and marketing, says that the increasingly negative view of SUVs is “a big deal, and it’s real.”64 Managers also scan their environments to reduce uncertainty. Faced with the responsibility of developing the marketing campaigns that sell their companies’ most important products, the chief marketing officers (CMOs) of the world’s best organizations willingly pay $50,000 a year to join the “Marketing 50,” an exclusive group of CMOs who meet several times a year to exchange ideas and pick each others’ brains. Richard Smith, founder of the group, says, “It’s a noncompetitive group with just one executive from a particular industry, so they have a chance to get ideas they can use that their competitors may not know about and also try to figure out some of their common problems.” Michael Linton, Best Buy’s CMO, believes the “Marketing 50” is fantastic for finding out what other companies and CMOs are doing (i.e., reducing uncertainty). He says, “It’s impossible for any one company to know about every new tool, so hearing what is working for others helps.”65 Organizational strategies also affect environmental scanning. In other words, managers pay close attention to trends and events that are directly related to their company’s ability to compete in the marketplace.66 And by keeping their eyes and ears open, managers sometimes come across important information by accident. For example, Gary Costley, an employee at Kellogg’s, was pulling into the parking lot at work when he noticed a crane on the loading dock of the General Foods’ Post cereal plant across the street. He could see that the crane was unloading a special machine made by a German company for manufacturing cereal. This caught his attention because Kellogg’s was having trouble getting a similar machine from a French manufacturer to work. So he went to a store, purchased a camera and film, and stood across the street taking
environmental scanning Searching the environment for important events or issues that might affect an organization.
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pictures. A Post employee yelled, “Hey, you can’t do that.” Costley responded, “I’m standing on a public street taking photos. You shouldn’t unload your machines in plain sight.” The pictures helped convince Kellogg’s management to buy the German machines, rather than spending more time and money trying to make the French machines work.67 Finally, environmental scanning is important because it contributes to organizational performance. Environmental scanning helps managers detect environmental changes and problems before they become organizational crises.68 Furthermore, companies whose CEOs do more environmental scanning have higher profits.69 CEOs in better-performing firms scan their firm’s environments more frequently and scan more key factors in their environments in more depth and detail than do CEOs in poorer-performing firms.70
4.2 Interpreting Environmental Factors After scanning, managers determine what environmental events and issues mean to the organization. Typically, managers view environmental events and issues as either threats or opportunities. When managers interpret environmental events as threats, they take steps to protect the company from further harm. For example, now that Internet phone service (i.e, VOIP) has emerged as a threat, traditional phone companies have responded by announcing billion-dollar plans to expand their fiber optic networks so that they can offer phone (using VOIP), Internet service, and TV packages, just like those the cable and satellite companies offer. However, the phone companies, such as Southwestern Bell, are finding that they are far behind the cable companies, which spent $65 billion over the last five years upgrading their digital networks. Industry analyst Glenn Greenberg says, “The telephone companies are way behind the curve.”71 By contrast, when managers interpret environmental events as opportunities, they consider strategic alternatives for taking advantage of those events to improve company performance. For example, ESPN, the sports television channel, sees an opportunity in the cell phone business. With Sprint providing the phone service, “ESPN Mobile” plans to tap into the market of hard-core sports fans who want instant access to sports scores and headlines—and even video— via their cell phones. Although some scores and headlines are already available through most cell phones, the information is hard to access; typically, getting it takes multiple clicks through the cell phone menu. By contrast, ESPN Mobile will provide much more sports information to its subscribers, and it will do so by providing scores, scrolling headlines (moving from right to left), and video on the phone’s primary screen. ESPN vice president John Skipper says, “Our feeling is that there will be some more avid sports fans who want sports more up front [on their phones]. Getting the sports scores requires a little work on your average phone right now.”72
4.3 Acting on Threats and Opportunities
cognitive maps Graphic depictions of how managers believe environmental factors relate to possible organizational actions.
After scanning for information on environmental events and issues, and interpreting them as threats or opportunities, managers have to decide how to respond to these environmental factors. Deciding what to do under conditions of uncertainty is difficult, however. Managers are never completely confident that they have all the information they need or that they correctly understand the information they have. Because it is impossible to comprehend all the factors and changes, managers rely on simplified models of external environments called “cognitive maps.” Cognitive maps summarize the perceived relationships between environmental factors and possible organizational actions. For example, the cognitive map shown in Exhibit 3.6 represents a small clothing store owner’s interpretation of
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Target – Wal-Mart
–
Low rent and taxes
+
Good location
Good value/good service most likely to produce Large mall success and profits. 20 minutes away
Low-cost
Reasonable selection and prices
+
Know customers well
+ + Good value Good service +
+ +
Low employee turnover
–
Too small to get volume discounts
– Large selection of latest fashions
Environmental Factors
Potential Strategies Company Strengths and Weaknesses
her business environment. The map shows three kinds of variables. The first variables, shown as rectangles, are environmental factors, such as a Wal-Mart or a large mall 20 minutes away. The second, shown in ovals, are potential actions that the store owner might take, such as a low-cost strategy; a good value, good service strategy; or a large selection of the latest fashions strategy. The third, shown as trapezoids, are company strengths, such as low employee turnover, and weaknesses, such as small size. The plus and minus signs on the map indicate whether the manager believes there is a positive or negative relationship between variables. For example, the manager believes that a low-cost strategy won’t work because Wal-Mart and Target are nearby. Offering a large selection of the latest fashions would not work either—not with the small size of the store and that large nearby mall. However, the manager believes that a good value, good service strategy would lead to success and profits because of the store’s low employee turnover, good knowledge of customers, reasonable selection of clothes at reasonable prices, and good location. In the end, managers must complete all three steps—environmental scanning, interpreting environmental factors, and acting on threats and opportunities—to make sense of changing external environments. Environmental scanning helps managers more accurately interpret their environments and take actions that improve company performance. Through scanning, managers keep tabs on what competitors are doing, identify market trends, and stay alert to current events that affect their company’s operations. Armed with the environmental information they have gathered, managers can then minimize the impact of threats and turn opportunities into increased profits.
Exhibit 3.6 Cognitive Maps
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Review 4: Making Sense of Changing Environments Managers use a three-step process to make sense of external environments: environmental scanning, interpreting information, and acting on it. Managers scan their environments based on their organizational strategies, their need for up-to-date information, and their need to reduce uncertainty. When managers identify environmental events as threats, they take steps to protect the company from harm. When managers identify environmental events as opportunities, they formulate alternatives for taking advantage of them to improve company performance. Using cognitive maps can help managers visually summarize the relationships between environmental factors and the actions they might take to deal with them.
Internal Environments internal environment The events and trends inside an organization that affect management, employees, and organizational culture.
organizational culture The values, beliefs, and attitudes shared by organizational members.
External environments are external trends and events that have the potential to affect companies. By contrast, the internal environment consists of the trends and events within an organization that affect the management, employees, and organizational culture. For example, consider the internal environment at SAS, the leading provider of statistical software. Unlike most software companies that expect employees to work 12- to 14-hour days, SAS closes its offices at 6 P.M. every evening. Employees also receive unlimited sick days each year. And to encourage employees to spend time with their families, there’s an on-site daycare facility, the company cafeteria has plenty of highchairs and baby seats, and the company even has a seven-hour workday. Plus, every Wednesday, the company passes out M&M chocolate candies, plain and peanut, to all employees— a total of more than 22.5 tons of M&Ms per year. SAS senior vice president Jim Davis says, “We are firm believers that happy employees equal happy customers.”73 Internal environments are important because they affect what people think, feel, and do at work. Given SAS’s internal environment, it shouldn’t surprise you to learn that almost no one quits. In a typical software company, 25 percent of the work force quits each year to take another job. At SAS, only 4 percent leave.74 Jeff Chambers, SAS’s vice president of human resources, says, “We have always had a commitment to investing in and cultivating meaningful, long-term relationships with our employees and clients. This has led to unusually low turnover in both populations and is at the core of our 28 years of sustained profitability and success.”75 Comments such as these reflect the key component in internal environments, organizational culture. More specifically, organizational culture is the set of key values, beliefs, and attitudes shared by organizational members. 5
5
After reading the next section, you should be able to explain how organizational cultures are created and how they can help companies be successful.
ORGANIZATIONAL CULTURES: CREATION, SUCCESS, AND CHANGE
Let’s take a closer look at 5.1 how organizational cultures are created and maintained, 5.2 the characteristics of successful organizational cultures, and 5.3 how companies can accomplish the difficult task of changing organizational cultures.
5.1 Creation and Maintenance of Organizational Cultures A primary source of organizational culture is the company founder. Founders like Thomas J. Watson (IBM), Sam Walton (Wal-Mart), and Bill Gates
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(Microsoft) create organizations in their own images and imprint them with their beliefs, attitudes, and values. For example, Thomas J. Watson, Sr., proclaimed that IBM’s three basic beliefs were the pursuit of excellence, customer service, and showing “respect for the individual,” meaning company employees. Microsoft employees share founder Bill Gates’s determination to stay ahead of software competitors. Says a Microsoft vice president, “No matter how good your product, you are only 18 months away from failure.”76 Though company founders are instrumental in the creation of organizational cultures, eventually founders retire, die, or choose to leave their companies. When the founders are gone, how are their values, attitudes, and beliefs sustained in the organizational culture? Answer: stories and heroes. Organizational members tell organizational stories to make sense of organizational events and changes and to emphasize culturally consistent assumptions, decisions, and actions.77 At Wal-Mart, stories abound about founder Sam Walton’s thriftiness as he strove to make Wal-Mart the low-cost retailer that it is today. In those days, we would go on buying trips with Sam, and we’d all stay, as much as we could, in one room or two. I remember one time in Chicago when we stayed eight of us to a room. And the room wasn’t very big to begin with. You might say we were on a pretty restricted budget. (Gary Reinboth, one of Wal-Mart’s first store managers)78
© JAY L. CLENDENIN
Today, Sam Walton’s thriftiness still permeates Wal-Mart. Everyone, including top executives and the CEO, flies coach rather than business or first class. When traveling on business, it’s still the norm to share rooms (though two to a room, not eight!) at inexpensive hotels like Motel 6 and Super 8 instead of more expensive Holiday Inns. Likewise, for business travel, Wal-Mart will reimburse only up to $15 per meal, which is half to one-third the reimbursement rate at similar-sized companies (remember, Wal-Mart is one of the largest companies in the world). At one of its annual meetings, CEO Lee Scott reinforced Sam Walton’s beliefs by exhorting Wal-Mart employees to bring back and use the free pencils and pens from their travels. Most people in the audience didn’t think he was kidding.79 A second way in which organizational culture is sustained is by recognizing and celebrating heroes. By definition, organizational heroes are organizational people admired for their qualities and achievements within the organization. Bowa Builders is a full-service construction company in Virginia. When it was renovating a large auto dealership, its carpet subcontractor mistakenly scheduled the new carpet to be delivered two weeks after it was to be installed. Rather than allow construction to be delayed, a Bowa employee kept the project on schedule by immediately reordering the carpet, flying to the carpet manufacturer’s factory, renting a truck, and then driving the carpet back to the auto dealership, all within 48 hours of learning about the problem. CEO and company cofounder Larry Weinberg says this story is told and retold within Bowa Builders as an example of heroic customer service. Moreover, the car dealership was so delighted with this extraordinary service that it has referred $10 million to $12 million in new business to Bowa Builders.80
organizational stories Stories told by organizational members to make sense of organizational events and changes and to emphasize culturally consistent assumptions, decisions, and actions.
organizational heroes People celebrated for their qualities and achievements within an organization.
Bowa Builders has no shortage of organizational heroes, in part because management supports employees' efforts to go to extraordinary lengths to please customers. Every Friday, managers bring lunch to workers on the job site.
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5.2 Successful Organizational Cultures Preliminary research shows that organizational culture is related to organizational success. As shown in Exhibit 3.7, cultures based on adaptability, involvement, a clear vision, and consistency can help companies achieve higher sales growth, return on assets, profits, quality, and employee satisfaction.81 Adaptability is the ability to notice and respond to changes in the organization’s environment. Cultures need to reinforce important values and behaviors, but a culture becomes dysfunctional if it prevents change, and one of the surest ways to do that is to discourage open discussion and disagreement. Organizational psychologist Kathleen Miller began working with a company that recognized the need to change its nonadaptive culture. However, she didn’t realize how dysfunctional the culture was until she tried to start an honest discussion about the company’s problems at one of her first meetings. The top managers simply would not speak up. They were so afraid to disagree with each other that they wrote their comments and questions anonymously on note cards and had them read aloud to the rest of the group.82 In cultures that promote higher levels of employee involvement in decision making, employees feel a greater sense of ownership and responsibility. Employee invlovement has been a hallmark of Genencor since its creation as a joint venture between Genentech and Corning in 1982. Genencor designs its human resources programs by regularly polling employees about which benefits they enjoy and which they would like the company to offer. Most dramatically, when Genencor built its headquarters, it gave its employees a say in the design. Scientists requested that the labs be along the building’s exterior so they could receive natural light. “I’ve worked in labs without windows,” says staff scientist Fiona Harding, “and seeing the sun makes the time spent in the lab much more pleasant.” For everyone else, the building features a “main street,” where employees congregate to collaborate and interact throughout the day. CEO Jean-Jacques Bienaime believes that these employee-driven design features lead to a more stimulating workplace. “If you want employees to be productive, you have to create a nurturing environment and let them be creative,” he says. Such a commitment to employee involvement in decision making is definitely paying off for the company. Its turnover rate was less than company vision A company’s purpose or reason for 4 percent (the national industry average is 18.5 percent), and its employees existing. generate approximately $60,000 more revenue per employee than its largest competitor, Novozymes.83 A company’s vision is its purpose or reason for existing. In organizational Exhibit 3.7 cultures with a clear organizational vision, the organization’s strategic purpose Successful Organizational Cultures and direction are apparent to everyone in the company. When managers are uncertain about their business environments, the vision helps guide the discussions, decisions, and behavior of the people in the company. At F. H. Faulding & Company, an Australia-based Adaptability provider of health-care products and services doing business in 70 countries, the vision is “delivering innovative and valued solutions in health care.”84 This vision lets employees know why the comInvolvement pany is in business (to deliver health-care solutions) and the values Consistency that really matter (innovative and valued solutions). To give its employees even more guidance, Faulding has clearly defined each of Clear Vision the key words in the vision statement. For example, “delivering” means targeting quality drugs, products, and services to the right place at the right time while concentrating on a global perspective. Likewise, “solutions” is defined as being focused, timely, and profSource: D. R. Denison & A. K. Mishra, “Toward a Theory of Organiitable by making quality products and services that satisfy cuszational Culture and Effectiveness, Organization Science 6 (1995): 204-223. tomers’ and partners’ needs.
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Specific vision statements strengthen organizational cultures by letting everyone know why the company is in business, what really matters (i.e., values), and how those values can be used to guide daily actions and behaviors.85 Commenting on the value of Faulding’s vision statement, Donna Martin, the senior vice president of human resources, says, “A vision has to be more than a set of target revenue or profit numbers to meet. It has to be elevating, inspiring, with a strong emphasis on the future. A vision has to be a compelling and crystal-clear statement about where the organization is heading.”86 You will learn more about vision statements in Chapter 5 on planning and decision making. Finally, in consistent organizational cultures, the company actively defines and teaches organizational values, beliefs, and attitudes. McDonald’s helps preserve its history and culture each year by having its executives work in its restaurants to celebrate founder Ray Kroc’s birthday. According to Kroc, this is to remind McDonald’s executives that “if it’s below [their] dignity to mop floors, clean toilets, and roll up [their] sleeves, then [they] are not going to succeed: [Their] attitude is wrong.” McDonald’s also has an exhibit called “Talk to Ray,” in which, thanks to messages videotaped before his death, anyone can “ask” Ray questions about McDonald’s values and history.87 Consistent organizational cultures are also called strong cultures because the core beliefs are widely shared and strongly held. Indeed, everyone who has ever worked at McDonald’s has been taught its four core values: quality, service, cleanliness, and value.88 Studies show that companies with consistent or strong corporate cultures typically outperform those with inconsistent or weak cultures most of the time.89 Why? The reason is that when core beliefs are widely shared and strongly held, it is easy for everyone to figure out what to do or not do to achieve organizational goals. Having a consistent or strong organizational culture doesn’t guarantee good company performance, however. Indeed, McDonald’s saw its sales and profits decline before turning its performance around in the last few years. When core beliefs are widely shared and strongly held, it is very difficult to bring about change. Consequently, companies with strong cultures tend to perform poorly when they need to adapt to dramatic changes in their external environments Their consistency sometimes prevents them from adapting to those changes.90
consistent organizational cultures When a company actively defines and teaches organizational values, beliefs, and attitudes.
Exhibit 3.8 Three Levels of Organizational Culture
5.3 Changing Organizational Cultures As shown in Exhibit 3.8, organizational cultures exist on three levels.91 First, on the surface level, are the reflections of an organization’s culture that can be seen and observed, such as symbolic artifacts (e.g., dress codes and office layouts), and workers’ and managers’ behaviors. Next, just below the surface, are the values and beliefs expressed by people in the company. You can’t see these values and beliefs, but they become clear if you listen carefully to what people say and to how decisions are made or explained. Finally, unconsciously held assumptions and beliefs are buried deep below the surface. These are the unwritten views and rules that are so strongly held and so widely shared that they are rarely discussed or even thought about unless someone attempts to change them or unknowingly violates them. When it comes to changing cultures, it can be
A Symbolic artifacts such as dress codes A Workers’ and managers’ behaviors
A What people say A How decisions are made and explained
1. Surface Level (seen and observed)
SEEN
2. Expressed Values and Beliefs (heard but not seen)
HEARD
A Widely shared 3. Unconsciously Held assumptions and beliefs Assumptions A Buried deep below surface and Beliefs BELIEVED A Rarely discussed or (unwritten and thought about rarely discussed)
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behavioral addition The process of having managers and employees perform new behaviors that are central to and symbolic of the new organizational culture that a company wants to create.
behavioral substitution The process of having managers and employees perform new behaviors central to the “new” organizational culture in place of behaviors that were central to the “old” organizational culture.
visible artifacts Visible signs of an organization’s culture, such as the office design and layout, company dress code, and company benefits and perks, like stock options, personal parking spaces, or the private company dining room.
very difficult to change unconscious assumptions and beliefs held deep below the surface. Instead, managers should focus on the parts of the organizational culture they can control; these include observable surface-level items, such as workers’ behaviors and symbolic artifacts, and expressed values and beliefs, which can be influenced through employee selection. Let’s see how these can be used to change organizational cultures. One way of changing a corporate culture is to use behavioral addition or behavioral substitution to establish new patterns of behavior among managers and employees. Behavioral addition is the process of having managers and employees perform a new behavior, while behavioral substitution is having managers and employees perform a new behavior in place of another behavior. The key in both instances is to choose behaviors that are central to and symbolic of the “old” culture you’re changing and the “new” culture that you want to create. One of the key behavioral changes at Continental Airlines in the last decade is that the airline has significantly increased its on-time arrivals.92 Under the “late-arrival culture,” a flight attendant would be more worried about leaving the gate with the right number of meals on the plane than leaving on time. According to then CEO Gordon Bethune, the attendant would say to the flight caterer, “I don’t care. I am not going without the 20 meals. That’s your problem.” Then the caterer would have to get the missing meals, and the flight would be 20 minutes late. Once Continental started rewarding its flight attendants and other employees for on-time arrivals and departures, behavior began to change (see Chapter 7 for a more detailed explanation of this change process at Continental). According to Bethune, now, under the “on-time arrival culture,” the flight attendant would say to the caterer who didn’t provide enough meals, “Hey, don’t you do this to me again.” The attendant would then close the plane’s door and leave the gate on time by “finding some investment bankers in the back who will trade food for booze.” According to Bethune, “That’s how she gets paid. That’s how behavior changes: We become collective winners and give things customers’ value.”93 Another way in which managers can begin to change corporate culture is to change the visible artifacts of their old culture, such as the office design and layout, company dress code, and recipients (or nonrecipients) of company benefits and perks like stock options, personal parking spaces, or the private company dining room. When Peter Giller became the CEO of International Power PLC, a British power company, he took dramatic steps to make the slowmoving company culture much more entrepreneurial. The most visible changes he made were to not take a company car, a multimillion dollar insurance policy (a standard perk for CEOs), or a salary. Although Giller receives a $6,500 check each month to cover living expenses, he’s otherwise paid entirely in company stock. Whereas most CEOs are guaranteed millions in pay and benefits, Giller won’t earn CEO-type money unless International Power’s growth and profits lead to substantial increases in the company’s stock price. Giller also changed the culture by switching from traditional offices to open offices, where people work side-by-side together at long tables. He also closed the company’s plush chairman’s suite, turning it into an employee coffee bar and transforming its private terrace into an outdoor area for company barbecues and receptions.94 Cultures can also be changed by hiring and selecting people with values and beliefs consistent with the company’s desired culture. Selection is the process of gathering information about job applicants to decide who should be offered a job. As discussed in Chapter 11 on human resources, most selection instruments measure whether job applicants have the knowledge, skills, and abilities needed to succeed in their jobs. Today, however, companies are increasingly testing job applicants to determine how the fit with the company’s desired culture (i.e., values and beliefs). Management consultant Ram Charan says, “A poor job match is not only harmful to the individual but also to the company.”95 At Bristol-Myers, people who didn’t fit the culture tended to leave.
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According to Ben Dowell, who runs Bristol-Myers’s Center for Leadership Development, “What came through was, those who left were uncomfortable in our culture or violated some core area of our value system.”96 The first step in hiring people who have values consistent with the desired culture is to define and describe that culture. Bristol-Myers hired an organizational psychologist who spent four months interviewing senior managers. He concluded that BristolMyers had a team-driven culture that focused on research and development, which meant that it valued self-motivated, intellectually curious people. The second step is to ensure that applicants fit with the culture by using selection tests, instruments, and exercises to measure these values and beliefs in job applicants. (See Chapter 11 for a complete review of applicant and managerial selection.) At Southwest Airlines, humor and a good attitude are two of the most important requirements in its new hires. Chairman and former CEO Herb Kelleher says, “What’s important is that a customer should get off the airplane feeling: ‘I didn’t just get from A to B. I had one of the most pleasant experiences I ever had and I’ll be back for that reason.’”97 For instance, on a flight from Houston to Dallas, a flight attendant addresses passengers over the speaker system, saying, “Could y’all lean in a little toward the center aisle, please?” Met with confused looks from passengers, he continues, “Just a bit, please. That’s it. No, the other way, sir. Thanks. You see, the pilot has to pull out of this space here, and he needs to be able to check the rearview mirrors.” On another Southwest plane, Yvonne Masters jokingly introduced her fellow flight attendants as her “former husband and his new girlfriend.”98 Southwest passenger Mark Rafferty said his favorite Southwest flight attendant joke was when “they told everyone on the plane’s left side, toward the terminal, to put their faces in the window and smile so our competitors can see what a full flight looks like.”99 Corny, yes, but the humor is exactly what Southwest and its customers want, and the airline gets it by hiring people consistent with its hard-working, fun-loving culture. Says Kelleher, “We draft great attitudes. If you don’t have a good attitude, we don’t want you, no matter how skilled you are. We can change skill level through training. We can’t change attitude.”100 Corporate cultures are very difficult to change. Consequently, there is no guarantee that any one approach—changing visible cultural artifacts, using behavioral substitution, or hiring people with values consistent with a company’s desired culture—will change a company’s organizational culture. The best results are obtained by combining these methods. Together, these are some of the best tools managers have for changing culture because they send the clear message to managers and employees that “the accepted way of doing things” has changed.
Review 5: Organizational Cultures: Creation, Success, and Change Organizational culture is the set of key values, beliefs, and attitudes shared by organizational members. Organizational cultures are often created by company founders and then sustained through the telling of organizational stories and the celebration of organizational heroes. Adaptable cultures that promote employee involvement, make clear the organization’s strategic purpose and direction, and actively define and teach organizational values and beliefs can help companies achieve higher sales growth, return on assets, profits, quality, and employee satisfaction. Organizational cultures exist on three levels: the surface level, where cultural artifacts and behaviors can be observed; just below the surface, where values and beliefs are expressed; and deep below the surface, where unconsciously held assumptions and beliefs exist. Managers can begin to change company cultures by focusing on the top two levels and by using behavioral substitution and behavioral addition, changing visible artifacts, and selecting job applicants with values and beliefs consistent with the desired company culture.
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Key Terms advocacy groups, 83 behavioral addition, 92 behavioral substitution, 92 business confidence indices, 76 buyer dependence, 82 cognitive maps, 86 company vision, 90 competitive analysis, 80 competitors, 80 complex environment, 72 consistent organizational cultures, 91 dynamic environment, 71 environmental change, 70
environmental complexity, 72 environmental scanning, 85 external environments, 70 general environment, 74 industry regulation, 82 internal environment, 88 media advocacy, 83 opportunistic behavior, 82 organizational culture, 88 organizational heroes, 89 organizational stories, 89 product boycott, 84 public communications, 83
punctuated equilibrium theory, 71 relationship behavior, 82 resource scarcity, 74 simple environment, 72 specific environment, 75 stable environment, 70 supplier dependence, 81 suppliers, 81 technology, 76 uncertainty, 74 visible artifacts, 72
Concept Check 1. Describe the three basic characteristics of changing external environments. 2. How do the characteristics of changing environments affect uncertainty? 3. What is the difference between the general and specific business environments? 4. List the components of the general business environment. 5. How do the elements of the specific business environment affect businesses?
6. Describe the three-step process that managers use to make sense of changing environments. 7. How are organizational cultures created and maintained? 8. What are the characteristics of successful organizational cultures? 9. Identify the three levels of organizational culture and give examples of each. 10. How can managers change organizational cultures?
Self-Assessment CHECK YOUR TOLERANCE FOR AMBIGUITY Think of the difference between playing chess (where you can see all the pieces and anticipate attacks and plan counterattacks) and playing poker (where no one knows anyone else’s hand, and you have to make guesses based on your interpretation of opponents’ betting patterns). In chess, there is little ambiguity, whereas in poker there is tremendous ambiguity. Although many people liken business to a game of chess, probably because of the strategic aspects of the game, business is actually more like poker. The business environment is complex and uncertain, and managers never really know all the cards the opposition is holding. Managers must learn to adapt to environmental
shifts and new developments—sometimes on a daily basis. For some managers, however, this can be a challenging task because everyone has a different comfort level when it comes to ambiguity. For some, not knowing all the details can be a source of significant stress, whereas for others uncertainty can be energizing. As a manager, you will need to develop an appropriate tolerance for ambiguity. For example, being stressed out every time interest rates change can be counterproductive, but completely ignoring the economic environment can be detrimental to your company’s performance. On page 614 of the Self-Assessment Appendix, you will find a 22-question survey designed to help you get a sense of your tolerance for ambiguity.
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Management Decision ENVIRONMENTAL ROLLER COASTER It couldn’t be a better day to be at Cedar Point amusement park. It’s mid-September, sunny, and 75 degrees, and there’s no one waiting in any of the queue lines. Passing by the Millennium Force roller coaster, you stop to get a slurpie and then sit down at a nearby picnic table to start thinking about the annual environmental scan. Since joining the management team of Cedar Point, a large regional amusement park located in Sandusky, Ohio, you’ve done this exercise 10 times. Each time, it is more difficult because the environment keeps changing, but doing the environmental assessment has kept Cedar Point viable. You think to yourself “We’ve just finished a tight season, but we managed to come out ahead. We are facing some big shifts, though both in the general business environment and in the amusement industry, so we need to build a plan to meet those environmental challenges.” Pausing for a moment, you stare at the coaster’s 80degree drop. Your mind dives just as steeply into a flurry of issues: shifts toward year-round schooling; trends in the insurance industry; new forms of entertainment; new competition; the effect of changing demographics on your attendance and your work force; higher gasoline prices; and the impact of the economy in general.
You’ve been able to increase the price of admission year after year, but how long can you continue to do that? Your straw makes a loud noise as you finish your slurpie. “I guess that means it’s time to head back to the office and figure out what trends are going to affect the park and how.” Questions 1. Consider the issues this Cedar Point manager is examining as part of this exercise. What other issues do you think he should examine? 2. Create a list of issues addressing each of the environmental factors discussed in the chapter (economy, technology, political/legal, sociocultural, customer, competitor, supplier, industry regulation). For each item on your list, explain how Cedar Point will face the challenges posed by that factor in its environment. 3. Based on the solutions you generated in question 2, how uncertain is the amusement park industry? Why do you think as you do? (Think about the environmental change, complexity, and resources of the amusement park industry. You may wish to use Exhibit 3.2 as a guide.)
Management Team Decision DOG DAY BLUES One of the reasons you accepted a management position at MicroTek several years ago was the company’s laidback culture.101 A loose organizational structure enables employees to move freely between projects, and the open office space encourages informal encounters and generates a feeling of teamwork. And among the very generous corporate perks is a policy allowing employees to bring their pets to work. It is not uncommon to see a small animal sitting in an employee’s inbox drinking from a hamster lick. Several employees bring their dogs, large and small, to the office. As the company has grown, thanks in part to its informal culture, more and more people are taking advantage of the pet policy, and problems are arising.
Food is swiped from desks, animals are rooting through trash bins, and dogs are marking territory on the partitions that surround their owners’ desks. Visiting customers often try to mask startled (at best) or disapproving (at worst) looks when they tour your facility for the first time—and even the second and third times. During a recent breakfast meeting, when a board member refused to share her bagel with the CFO’s dog, the dog relieved itself on her briefcase. At least one employee has complained of allergic reactions due to the high levels of pet dander in the office air, but rather than change the policy, you installed a high-power air cleaner. Despite the challenges, you have resisted changing the pet policy because it symbolizes both the company’s
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relaxed culture and MicroTek’s commitment to its employees’ work-life balance. This afternoon, however, you were notified by the federal Occupational Safety and Health Administration (OSHA) that your office does not meet the required indoor air quality standards. Apparently, the cleaner you installed can’t handle all the pet dander. To meet the standards, you’ll need an even more powerful air cleaner that costs between $100,000 and $200,000. That would be a significant investment in the pet policy! And who knows if it would solve the allergy problem. Is the policy worth the cost? In 2003, only 5,000 offices participated in “Bring Your Pet to Work Day,” but in 2004, that number rose to 10,000. Companies bigger than MicroTek have figured out how to make pet policies work: IAMS Pet Food, Replacements Ltd., the world’s largest supplier of old and new china; Netscape; and Touchstone Television, to name a few. A quarter of Burton Snowboards’ 230 employees brings their dogs to work every day! Anecdotal evidence from those companies indicates that pets can spur creativity and lower occupational stress. You ask yourself,
“How committed am I to the pet policy?” In other words, is the pet policy just trendy (or avant-garde), or does it say something deeper about your company? For this Management Team Decision, assemble three or four students to act as the management team for MicroTek. Include both pet owners and people without pets to avoid any bias. Before you begin the exercise, have each team member privately write down answers to each of the questions. By sharing your individual responses, you may be able to have a more varied and rounded discussion. Questions 1. Do you buy the expensive air cleaner or eliminate the pet policy? Why or why not? 2. If you choose to stop allowing animals at the office, what effect, if any, do you think the change will have on the company’s culture? 3. Can you think of a way to allow people to bring pets to work without upgrading the air cleaner or running afoul of OSHA?
Develop Your Career Potential DEALING WITH THE PRESS In this age of 24-hour cable news channels, tabloid news shows, and aggressive local and national news reporters intent on exposing corporate wrongdoing, one of the most important skills for a manager to learn is how to deal effectively with the press.102 Test your ability to deal effectively with the press by putting yourself in the following situations. To make the situation more realistic, read each scenario and then give yourself two minutes to write a response to each question.
Fatty Restaurant Food Contributes to Heart Attacks Today, in the nation's capital, a public-interest group held a press conference to release the results of a study that found that the food sold in most Chinese restaurants is high in fat. The group claims that the most popular Chinese dishes, including orange chicken, pork fried rice, and Hunan beef, contain nearly as much fat as the food you get from fast-food chains like McDonald's, Wendy's, and Burger King. (Much of it is fried or is covered with heavy sauces.) Furthermore, the group says that customers who hope to keep their cholesterol and blood pressure low by eating Chinese food are fooling themselves. A TV reporter from Channel 5 called you at Ping’s Garden, your Szechuan-style Chinese restaurant,
to get your response to this study. When he and the camera crew arrived, he asked you the following questions: 1. “A new study released today claims that food sold in Chinese restaurants is on average nearly as fattening as that sold at fast-food restaurants. How healthy is the food that you serve at Ping’s?” 2. “Get the camera in close here [camera closes in to get the shot] because I want the audience at home to see that you don't provide any information on your menu about calories, calories from fat, or cholesterol. Without this information [camera pulls back to get a picture of you and the reporter], how can your customers know whether the food that you serve is healthy for them?” 3. “These new studies were based on lunches and dinners sampled from Chinese restaurants across the nation. A local company, Huntington Labs, has agreed to test foods from local restaurants so that we can provide accurate information to our viewers. Would you agree to let us sample the main dishes in your restaurant to test the level of calories, calories from fat, and cholesterol? Furthermore, can we take the cameras into your restaurant so that we can get your customers' reactions to these studies?”
Take Two
Biz Flix Brazil
Set somewhere in the twentieth century, the retro-futuristic world of Brazil is a gritty, urban cesspool patched over with cosmetic surgery and “designer ducts for your discriminating taste.” Automation pervades every facet of life from the toaster and coffee machine to doorways, but paperwork, inefficiency, and mechanical failures are the rule. Brazil stars Jonathan Pryce in the role of Sam, a low-level bureaucrat whose primary interests in life are his vivid dream fantasies to the tune of “Brazil,” a 1940s big-band hit. In this scene, Sam is starting a new job and is being assigned an office and employee identification number. What to Watch for and Ask Yourself
1. Describe the culture at Sam’s new employer. 2. How easy would it be to change the culture at Sam’s new company? 3. In which kind of business environment do you think the culture at Sam’s employer is able to operate most successfully?
Management Workplace Boston Duck Tours
After a bus tour of the United States that passed through Memphis, Andy Wilson was inspired to create a unique tourism company in Boston. Even though he had a great idea, enlisted the aid of a consultant to prepare a solid business plan, and cultivated a source for the technology he needed, Andy still faced challenges in the external environment. Nonetheless, he persevered and created Boston Duck Tours, the number one tourist attraction in the state of Massachusetts. What to Watch for and Ask Yourself
1. What components of the external business environment does Andy Wilson mention in the video? 2. How would you characterize Andy’s relationship with Bob McDowell? 3. Outline the external environment of Boston Duck Tours. 4. How would you describe the culture of Boston Duck Tours?
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Ethics and Social Responsibility
C H A P T E R
O U T L I N E
Chapter4 What Would You Do? What Is Ethical and Unethical Workplace Behavior? 1. Ethics and the Nature of Management Jobs 2. Workplace Deviance 3. U.S. Sentencing Commission Guidelines for Organizations 3.1 Who, What, and Why? 3.2 Determining the Punishment
How Do You Make Ethical Decisions? 4. Influences on Ethical Decision Making 4.1 Ethical Intensity of the Decision 4.2 Moral Development 4.3 Principles of Ethical Decision Making
5. Practical Steps to Ethical Decision Making 5.1 Selecting and Hiring Ethical Employees
5.2 Codes of Ethics 5.3 Ethics Training 5.4 Ethical Climate
What Is Social Responsibility? 6. To Whom Are Organizations Socially Responsible? 7. For What Are Organizations Socially Responsible? 8. Responses to Demands for Social Responsibility 9. Social Responsibility and Economic Performance Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise
Xtra! Eight exhibit worksheets, author FAQs, quiz, Management News, and the video clips from the chapter with exercises Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
Gap, Inc. Headquarters, San Francisco, California.1 When you decided to join Gap as its new CEO (Gap, Inc. runs Gap, Banana Republic, and Old Navy clothing stores), your teenage daughter immediately asked, “Doesn’t Gap use sweatshops?” You weren’t surprised by her question, as the company has received intense negative news coverage regarding the treatment of workers in the overseas factories from which it buys its clothes. For example, a worker for a Gap supplier in Lesotho, Africa, complained, “The factory is dusty. We can’t escape breathing in the the fibers. When we cough, if the t-shirt we were working on was made of blue fabric, then our mucus would be full of blue fibers.” A worker in another Gap supplier’s factory in Bangladesh said, “If we make simple mistakes, they beat us up. I made some small mistakes one time, so the supervisor came and slapped my head and pulled my ears. And if we make mistakes, they don’t pay us for our work.” In El Salvador, where workers complained about abuse and terrible working conditions, worker Maria Luz Panameno said, “I’m very proud to sew pants for Gap, but the board of directors should not be proud of what is happening to us. Gap has abandoned us.” Some workers pointed out that wages were so low that they couldn’t buy enough food for themselves and their families. Steve Weingarten, a union organizer who tries to unionize and represent factory workers, says, “We want Gap to stop exploiting sweatshop labor around the world. We want them to pay a wage that allows a decent standard of living and allows workers to organize unions to improve their conditions in factories.” Is Gap the only company that relies on such suppliers? No, it isn’t. According to Kirk Douglass of Pivot International, a manufacturing company that owns factories in the Philippines and does work with Chinese companies, “If you go into
What Would You Do?
almost any plant in the nondeveloped countries of the Far East, you’re going to see things that OSHA [Occupational Safety and Health Administration] or EPA [Environmental Protection Agency] would shut down tomorrow.” For years, because of strong competition and price-conscious consumers, retailers like Gap have quickly switched orders from one factory or country to another whenever they could find a lower price. According to protest groups, that intense pressure to keep prices low has encouraged factory owners and managers to do everything they can to cut their costs, including mistreating workers. And with 4,000 factories in 50 countries supplying clothes for Gap, Banana Republic, and Old Navy stores, protest groups see Gap as a big part of the problem. With intense negative publicity, protest groups calling for worldwide boycotts of Gap products and stores, and the company losing money, you couldn’t find a much tougher situation as a new CEO. On the one hand, because Gap is STUDY TIP a publicly traded company, Every chapter in this book one of your most important contains diagrams and tables responsibilities is to keep your stockholders happy by to illustrate the text material. making sure the company is If you have Xtra!, worksheets profitable. And that means made from these exhibits are your overseas suppliers have available to help you review. to keep their prices low. On Download them, fill them in, the other hand, negative publicity and boycotts may lower and then check your work sales and reduce profits. So by comparing your worksheet how do you decide whose into the original exhibit in terests—stockholders, supthe chapter. pliers, overseas workers, or protesters—take precedence? Furthermore, is Gap really responsible for the terrible treatment of overseas workers? In other words, is this your problem, or a problem that the managers and owners of the overseas factories need to address? Finally, how should Gap respond? Should you do nothing, make minimal changes, or aggressively tackle these issues even if doing so affects the company’s bottom line? If you were the new CEO of Gap, Inc., what would you do?
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The dilemma facing Gap’s new CEO is an example of the tough decisions involving ethics and social responsibility that managers face. Unfortunately, one of the “real-world” aspects of these decisions is that no matter what you decide, someone or some group will be unhappy with the outcome. Managers don’t have the luxury of choosing theoretically optimal, win-win solutions that are obviously desirable to everyone involved. In practice, solutions to ethics and social responsibility problems aren’t optimal. Often, managers must be satisfied with a solution that just “makes do” or “does the least harm.” Crystalclear rights and wrongs rarely reveal themselves to managers charged with “doing the right thing.” The business world is much messier than that. We begin this chapter by examining ethical behavior in the workplace and explaining how unethical behavior can expose a business to penalties under the U.S. Sentencing Guidelines for Organizations. Second, we examine the influences on ethical decision making and review practical steps that managers can take to improve ethical decision making. We finish by considering to whom organizations are socially responsible, what organizations are socially responsible for, how they can respond to societal expectations for social responsibility, and whether social responsibility hurts or helps an organization’s economic performance.
What Is Ethical and Unethical Workplace Behavior? ethics
Ethics is the set of moral principles or values that defines right and wrong for a
The set of moral principles or values that defines right and wrong for a person or group.
person or group. Unfortunately, numerous studies have consistently produced distressing results about the state of ethics in today’s business world. In a nationwide survey of 2,300 workers, 75 percent indicated that they had seen unethical behavior at work, such as deceptive sales practices, unsafe working conditions, environmental breaches, and mishandling of confidential or proprietary information, within the last year.2 A similar survey of 2,293 workers across 48 states found that less than half (47 percent) felt that the senior leaders in their companies were ethical.3 Finally, in a study of 1,324 randomly selected workers, managers, and executives across multiple industries, 48 percent of the respondents admitted to actually committing an unethical or illegal act in the past year! These acts included cheating on an expense account, discriminating against coworkers, forging signatures, paying or accepting kickbacks, and “looking the other way” when environmental laws were broken.4 Clearly, in an era with widely publicized corporate scandals at Tyco, HealthSouth, Fannie Mae, and Adelphia (where executives allegedly committed fraud by overstating company results by billions of dollars and used company funds for their personal gain), poor business ethics is a serious and widespread problem.5 Winn Swenson, director for integrity management services at KPMG, says, “Corporations need to recognize that the problem is out there.”6 The studies also contained good news, however. When people are convinced that they work in an ethical work environment, they are six times more likely to stay with that company than if they believe they work in an unethical environment.7 Furthermore, when 570 white-collar workers were asked which of 28 qualities were important in company leaders, honesty (24 percent) and integrity/morals/ethics (16 percent) ranked by far the highest (caring/compassion was third at 7 percent).8 In short, much needs to be done to make workplaces more ethical, but, and this is very important, most managers and employees want this to happen. 1 2
After reading the next three sections, you should be able to discuss how the nature of management jobs creates the possibility for ethical abuses. identify common kinds of workplace deviance.
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describe the U.S. Sentencing Commission Guidelines for Organizations and explain how they both encourage ethical behavior and punish unethical behavior by businesses.
ETHICS AND THE NATURE OF MANAGEMENT JOBS
Ethical behavior follows accepted principles of right and wrong. By contrast,
ethical behavior
unethical management behavior, such as lying about company profits or knowingly producing an unsafe product, occurs when managers personally violate accepted principles of right and wrong or encourage others to do so. Because of the nature of their jobs, managers can be tempted to engage in unethical managerial behavior in four areas: authority and power, handling information, influencing the behavior of others, and setting goals. The authority and power inherent in some management positions can tempt managers to engage in unethical practices. Because managers often control company resources, there is a risk that some managers will cross the line from legitimate use of company resources to personal use. For example, treating a client to dinner is a common and legitimate business practice in many companies. But what about treating a client to a ski trip? Taking the company jet to attend a business meeting in San Diego is legitimate. But how about using the jet to come home to Chicago by way of Honolulu? Human resources can be misused as well. For example, unless it’s in an employee’s job description, using an employee to do personal chores, like picking up the manager’s dry cleaning, is unethical behavior. Even worse, though, is using one’s managerial authority and power for direct personal gain as some managers have done by using corporate funds to pay for extravagant personal parties, lavish home decorating, jewelry, or expensive pieces of art. Handling information is another area in which managers must be careful to behave ethically. Information is a key part of management work. Managers collect it, analyze it, act on it, and disseminate it. In doing so, they are expected to be truthful and, when necessary, to keep confidential information confidential. Leaking company secrets to competitors, “doctoring” the numbers, wrongfully withholding information, and lying are some of the ways managers may misuse information entrusted to them. After thousands of customers canceled subscriptions because their papers weren’t delivered on time (thanks to chronic problems at a new printing facility) and a “horrendous drop” in advertising dollars severely lowered revenues, managers at the Chicago Sun-Times began inflating its daily sales numbers so that it could charge more for advertising and offset the declining revenues. By fraudulently padding the numbers by 50,000 papers per day, the Sun-Times tricked advertisers into paying much higher advertising rates. John Cruickshank, who became the paper’s new publisher after the scandal was discovered, admitted, “Our appetite for fake numbers became greater and greater.”9 Managers must also be careful to behave ethically in the way they influence the behavior of others, especially those they supervise. Managerial work gives managers significant power to influence others. If managers tell employees to perform unethical acts (or face punishment), such as “faking the numbers to get results,” then they are abusing their managerial power. This is sometimes called the “move it or lose it” syndrome. “Move it or lose it” managers tell employees, “Do it. You’re paid to do it. If you can’t do it, we’ll find somebody who can.”10 A study of 400 managers found that the “move it or lose it” syndrome even affects top managers. Forty-seven percent of the corporate executives in this study said they would be willing to commit financial fraud by understating accounting write-offs that reduced company profits. Professor Art Brief, who conducted the study, said, “People in subordinate roles will comply with their superiors even when that includes wrongdoing that goes against their individual
Behavior that conforms to a society's accepted principles of right and wrong.
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ADAM ROUNDTREE/BLOOMBERG NEWS/LANDOV
moral code. I thought they would stick with their values, but most organizations are structured to produce obedience.”11 Setting goals is another way that managers influence the behavior of their employees. If managers set unrealistic goals, the pressure to perform and achieve those goals can influence employees to engage in unethical business behaviors, especially if they are just short of meeting their goals or a deadline.12 After disappointing sales numbers at WorldCom, a regional vice president sent this email to sales representatives and managers: “Enough is enough of this disgraceful trend. Please write up everyone that missed their forecast and let them know further failure to accurately forecast [their numbers] will result in further disciplinary action up to termination from the company.”13 At this point, numerous sales representatives began double booking their sales (thus “doubling” their sales and their commissions) in two separate sales revenue databases (one from the MCI division and one from WorldCom) that had not yet been merged. According to former manager Neil Potter, double booking “was going on everywhere.”14 As former human resource manager Hank Larkin said, “It was really a numbers game with WorldCom. And people would do anything to make those numbers.”15
Former WorldCom CEO Bernard Ebbers is pictured here arriving at court, where he was eventually found guilty of fraud, conspiracy, and filing false documents, which led to the massive $11 billion accounting fraud at the telecommunications carrier. Ebbers faces up to 85 years in prison.
Review 1: Ethics and the Nature of Management Jobs Ethics is the set of moral principles or values that define right and wrong. Ethical behavior occurs when managers follow those principles and values. Because they set the standard for others in the workplace, managers can model ethical behavior by using resources for company business and not personal gain. Furthermore, managers can encourage ethical behavior by handling information in a confidential and honest fashion, by not using their authority to influence others to engage in unethical behavior, by not creating policies that unintentionally reward employees for unethical behavior, and by setting reasonable rather than unreasonable goals. 2
workplace deviance Unethical behavior that violates organizational norms about right and wrong.
production deviance Unethical behavior that hurts the quality and quantity of work produced.
property deviance Unethical behavior aimed at the organization's property or products.
WORKPLACE DEVIANCE
Depending on which study you look at, one-third to three-quarters of all employees admit that they have stolen from their employers, committed computer fraud, embezzled funds, vandalized company property, sabotaged company projects, faked injuries to receive workers’ compensation benefits or insurance, or been “sick” from work when they weren’t really sick. Experts estimate that unethical behaviors like these, which researchers call “workplace deviance,” may cost companies as much as $660 billion a year, or roughly 6 percent of their revenues.16 More specifically, workplace deviance is unethical behavior that violates organizational norms about right and wrong. As Exhibit 4.1 shows, workplace deviance can be categorized by how deviant the behavior is, from minor to serious, and by the target of the deviant behavior, either the organization or particular people in the workplace.17 One kind of workplace deviance, called production deviance, hurts the quality and quantity of work produced. Examples include leaving early, taking excessively long work breaks, intentionally working slower, or wasting resources. Property deviance is unethical behavior aimed at company property or products. Examples include sabotaging, stealing, or damaging equipment or products, and overcharging for services and then pocketing the difference. For example,
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Exhibit 4.1
Organizational
Production Deviance
Property Deviance
A Leaving early A Taking excessive breaks A Intentionally working slow A Wasting resources
A A A A
Sabotaging equipment Accepting kickbacks Lying about hours worked Stealing from company
Serious
Minor
Political Deviance A A A A
Types of Workplace Deviance
Personal Aggression
Showing favoritism Gossiping about coworkers Blaming coworkers Competing nonbeneficially
A Sexual harassment A Verbal abuse A Stealing from coworkers A Endangering coworkers
Interpersonal Source: Republished with permission of Academy of Management, P.O .Box 3020, Briar Cliff Manor, NY, 10510-8020. “A Typology of Deviant Workplace Behaviors,” (Figure), S. L. Robinson & R. J. Bennett. Academy of Management Journal, 1995, Vol. 38. Reproduced by permission of the publisher via Copyright Clearance Center, Inc.
property deviance in the form of stealing was so bad at the telecommunications company where Bill Weiss worked that employees referred to the supply room as the “gift shop” where everything was available at “five-finger discount prices.” Perforated boards, which were used to make prototypes for electronic devices, were taken by employees to finish the walls in their basements. Leather work gloves disappeared only to end up being used in employees’ gardens. Said Weiss, “Every April, 4,000 pairs of these things used to disappear.”18 Sometimes, property deviance involves the sabotage of company property. At Omega Engineering, an employee planted a software bomb in the centralized file server containing the company’s key programs and data. The code destroyed the programs and data that ran the machines in Omega’s manufacturing plant. The company lost $10 million as a result, including $2 million in reprogramming costs. Eighty employees had to be laid off because of lost business resulting from the incident.19 The theft of company merchandise by employees, called employee shrinkage, is another common form of property deviance. Employee shrinkage, which costs traditional U.S. retailers more than $15.8 billion a year and typically reduces store profits by 2 to 3 percent, takes many forms.20 “Sweet hearting” occurs when employees discount or don’t ring up merchandise their family or friends bring to the cash register. In “dumpster diving,” employees unload trucks, stash merchandise in a dumpster, and then retrieve it after work.21 To help grocery stores reduce employee shrinkage, which costs the typical store approximately $350,000 per year, companies such as Procter & Gamble and Gillette are inserting radio frequency antitheft tags (see Chapter 17 for further information), some as small as the head of a pin, in low-cost household products like Bounty paper towels and Gillette blades and razors. The antitheft tags have built-in antennas that transmit unique identification numbers that enable a store to track a product and determine whether it “disappears” off the
employee shrinkage Employee theft of company merchandise.
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political deviance Using one's influence to harm others in the company.
personal aggression Hostile or aggressive behavior toward others.
loading truck, falls off the shelf, is properly purchased, or is stolen by employees when they leave for the day.22 Whereas production and property deviance harm companies, political deviance and personal aggression are unethical behaviors that hurt particular people within companies. Political deviance is using one’s influence to harm others in the company. Examples include making decisions based on favoritism rather than performance, spreading rumors about coworkers, or falsely blaming others for mistakes they didn’t make. Personal aggression is hostile or aggressive behavior toward others. Examples include sexual harassment, verbal abuse, stealing from coworkers, or personally threatening coworkers. One of the fastest-growing kinds of personal aggression is workplace violence. A former Navistar employee forced his way into a Chicago factory and killed four people after firing 30 shots from an AK-47. The day after Christmas, an employee of Edgewater Technology walked into the accounting department and shot seven people dead. And, in the worst mass murder in Hawaii’s history, a frustrated copier repairman killed seven people outside a parts warehouse in Honolulu.23 More than 2 million Americans are victims of some form of workplace violence each year. Between 650 and 1,000 people are killed at work each year.24 Though many victims are police officers, security guards, or taxi drivers, store owners and company managers are killed most often.25 For more information on workplace violence, see the Web site of the National Institute for Occupational Safety and Health, http://www.cdc.gov/niosh/violfs.html.
Review 2: Workplace Deviance Workplace deviance is behavior that violates important organizational norms about right and wrong and harms the organization or its workers. Production deviance and property deviance harm the company, whereas political deviance and personal aggression harm individuals within the company. 3
U.S. SENTENCING COMMISSION GUIDELINES FOR ORGANIZATIONS
A male supervisor is sexually harassing female coworkers. A sales representative offers a $10,000 kickback to persuade an indecisive customer to do business with his company. A company president secretly meets with the CEO of her biggest competitor, and they agree not to compete in markets where the other has already established customers. Each of these behaviors is clearly unethical (and, in these cases, illegal, too). Historically, if management was unaware of such activities, the company could not be held responsible for an employee’s unethical acts. Since 1991, however, when the U.S. Sentencing Commission Guidelines for Organizations were established, companies can be prosecuted and punished even if management didn’t know about the unethical behavior. Moreover, penalties can be substantial, with maximum fines approaching $300 million!26 Let’s examine 3.1 to whom the guidelines apply and what they cover and 3.2 how, according to the guidelines, an organization can be punished for the unethical behavior of its managers and employees.
3.1 Who, What, and Why? Nearly all businesses, nonprofits, partnerships, labor unions, unincorporated organizations and associations, incorporated organizations, and even pension funds, trusts, and joint stock companies are covered by the guidelines. If your organization can be characterized as a business (remember, nonprofits count, too), then it is subject to the guidelines.27 The guidelines cover offenses defined by federal laws, such as invasion of privacy, price fixing, fraud, customs violations, antitrust violations, civil rights violations, theft, money laundering, conflicts of interest, embezzlement, dealing
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in stolen goods, copyright infringements, extortion, and more. It’s not enough merely to stay “within the law,” however. The purpose of the guidelines is not just to punish companies after they or their employees break the law, but rather to encourage companies to take proactive steps that will discourage or prevent white-collar crime before it happens. The guidelines also give companies an incentive to cooperate with and disclose illegal activities to federal authorities.28
3.2 Determining the Punishment The guidelines impose smaller fines on companies that take proactive steps to encourage ethical behavior or voluntarily disclose illegal activities to federal authorities. Essentially, the law uses a “carrot-and-stick” approach. The stick is the threat of heavy fines that can total millions of dollars. The carrot is a greatly reduced fine, but only if the company has started an effective compliance program (discussed below) to encourage ethical behavior before the illegal activity occurs.29 The method used to determine a company’s punishment illustrates the importance of establishing a compliance program. The first step is to compute the base fine by determining what level of offense has occurred. The level of the offense (i.e., its seriousness) varies depending on the kind of crime, the loss incurred by the victims, and how much planning went into the crime. For example, simple fraud is a level 6 offense (there are 38 levels in all). But if the victims of that fraud lost more than $5 million, that level 6 offense becomes a level 22 offense. Moreover, anything
Offense Level 6 or less 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 or more
Base Fine $
5,000 7,500 10,000 15,000 20,000 30,000 40,000 60,000 85,000 125,000 175,000 250,000 350,000 500 ,000 650,000 910,000 1,200,000 1,600,000 2,100,000 2,800,000 3,700,000 4,800,000 6,300,000 8,100,000 10,500,000 13,500,000 17,500,000 22,000,000 28,500,000 36,000,000 45,500,000 57,500,000 72,500,000
0.05 $
250 375 500 750 1,000 1,500 2,000 3,000 4,250 6,250 8,750 12,500 17,500 25,000 32,500 45,500 60,000 80,000 105,000 140,000 185,000 240,000 315,000 405,000 525,000 675,000 875,000 1,100,000 1,425,000 1,800,000 2,275,000 2,875,000 3,625,000
0.5 $
2,500 3,750 5,000 7,500 10,000 15,000 20,000 30,000 42,500 62,500 87,500 125,000 175,000 250,000 325,000 455,000 600,000 800,000 1,050,000 1,400,000 1,850,000 2,400,000 3,150,000 4,050,000 5,250,000 6,750,000 8,750,000 11,000,000 14,250,000 18,000,000 22,750,000 28,750,000 36,250,000
1.0 $
5,000 7,500 10,000 15,000 20,000 30,000 40,000 60,000 85,000 125,000 175,000 250,000 350,000 500,000 650,000 910,000 1,200,000 1,600,000 2,100,000 2,800,000 3,700,000 4,800,000 6,300,000 8,100,000 10,500,000 13,500,000 17,500,000 22,000,000 28,500,000 36,000,000 45,500,000 57,500,000 72,500,000
Source: “Chapter Eight—Part C—Fines,” 2004 Federal Sentencing Guidelines, [Online] available at http://www.ussc.gov/2004guid/8c2_4.htm, 27 January 2005.
Exhibit 4.2 Offense Levels, Base Fines, Culpability Scores, and Possible Total Fines under the U.S. Sentencing Commission Guidelines for Organizations
2.0 $
10,000 15,000 20,000 30,000 40,000 60,000 80,000 120,000 170,000 250,000 350,000 500,000 700,000 1,000,000 1,300,000 1,820,000 2,400,000 3,200,000 4,200,000 5,600,000 7,400,000 9,600,000 12,600,000 16,200,000 21,000,000 27,000,000 35,000,000 44,000,000 57,000,000 72,000,000 91,000,000 115,000,000 145,000,000
3.0 $
15,000 22,500 30,000 45,000 60,000 90,000 120,000 180,000 255,000 375,000 525,000 750,000 1,050,000 1,500,000 1,950,000 2,730,000 3,600,000 4,800,000 6,300,000 8,400,000 11,100,000 14,400,000 18,900,000 24,300,000 31,500,000 40,500,000 52,500,000 66,000,000 85,500,000 108,000,000 136,500,000 172,500,000 217,500,000
4.0 $
20,000 30,000 40,000 60,000 80,000 120,000 160,000 240,000 340,000 500,000 700,000 1,000,000 1,400,000 2,000,000 2,600,000 3,640,000 4,800,000 6,400,000 8,400,000 11,200,000 14,800,000 19,200,000 25,200,000 32,400,000 42,000,000 54,000,000 70,000,000 88,000,000 114,000,000 144,000,000 182,000,000 230,000,000 290,000,000
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beyond minimal planning to commit the fraud results in an increase of two levels to a level 24 offense. How much difference would this make to the company? As Exhibit 4.2 shows, crimes at or below level 6 incur a base fine of $5,000, whereas the base fine for level 24 is $2.1 million. So the difference is $2.095 million! The base fine for level 38, the top-level offense, is a hefty $72.5 million. After assessing a base fine, the judge computes a culpability score, which is a way of assigning blame to the company. The culpability score can range from a minimum of 0.05 to a maximum of 4.0. The greater the corporate responsibility in conducting, encouraging, or sanctioning illegal or unethical activity, the higher the culpability score. A company that already has a compliance program and voluntarily reports the offense to authorities will incur a culpability score of 0.05. By contrast, a company whose management secretly plans, approves, and participates in illegal or unethical activity will receive the maximum score of 4.0. The culpability score is critical because the total fine is computed by multiplying the base fine by the culpability score. Going back to our level 24 fraud offense, the left point of the upper arrow in Exhibit 4.2 shows that a company with a compliance program that turns itself in will be fined only $105,000 ($2,100,000 3 0.05). In contrast, a company that secretly planned, approved, and participated in illegal activity will be fined $8.4 million ($2,100,0003 3 4.0), as shown by the right point of the upper arrow. The difference is even greater for level 38 offenses. As shown by the left point of the bottom arrow, a company with a compliance program and a 0.05 culpability score is fined only $3.625 million, whereas a company with the maximum 4.0 culpability score is fined a whopping $290 million, as indicated by the right point of the bottom arrow. These differences clearly show the importance of having a compliance program in place. Over the last decade, 1,494 companies have been charged under the U.S. Sentencing Guidelines. Seventy-six percent of those charged were fined, with the average fine exceeding $2 million. Company fines are on average 20 times larger now than before the implementation of the guidelines in 1991.30 Fortunately, for companies that want to avoid paying these stiff fines, the U.S. Sentencing Guidelines clearly spell out the seven necessary components of an effective compliance program.31 Exhibit 4.3 lists those components. Caremark International, a managed-care service provider in Delaware, pleaded guilty to criminal charges related to its physician contracts and improper patient referrals. When it was sued by shareholders for negligence and poor management, the Delaware court dismissed the case, ruling that the company’s ethics compliance program, built on the components described in Exhibit 4.3, was a “good-faith attempt” to monitor employees and that the company did not knowingly allow illegal and unethical behavior to occur. The court went on to rule that a compliance program based on the U.S. Sentencing Guidelines was enough to shield the company from liability.32 For more information, see “An Overview of the Organizational Sentencing Guidelines” at http://www.ussc.gov/training/corpover.PDF and “Sentencing Guidelines Educational Materials” at http://www.ussc.gov/training/educat.htm
Review 3: U.S. Sentencing Commission Guidelines Under the U.S. Sentencing Commission Guidelines, companies can be prosecuted and fined up to $300 million for employees’ illegal actions. Fines are computed by multiplying the base fine by a culpability score, which ranges from 0.05 to 4.0. Companies that establish compliance programs to encourage ethical behavior can reduce their culpability scores and their fines. Companies without compliance programs can face much heavier fines than companies with established programs. Compliance programs must establish standards and
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omplianc vise c Re gram if requiree d pro
1
7
Establish Improve
standards and procedures
program after violations
6
Enforce
Assign
standards consistently and fairly
upper-level managers to be in charge
5
Train
Delegate
employees on standards and procedures
decision-making authority only to ethical employees
Encourage employees to report violations
2
3
4 Source: D. R. Dalton, M. B. Metzger, & J. W. Hill, “The 'New' U.S. Sentencing Commission Guidelines: A Wake-up Call for Corporate America,” Academy of Management Executive 8 (1994): 7–16.
Exhibit 4.3
procedures, be run by top managers, encourage hiring and promotion of honest and ethical people, encourage employees to report violations, educate employees about compliance, punish violators, and find ways to improve the program after violations occur.
How Do You Make Ethical Decisions? On a cold morning in the midst of a winter storm, schools were closed, and most people had decided to stay home from work. Nevertheless, Richard Addessi had already showered, shaved, and dressed for the office. Addessi was just four months short of his 30-year anniversary with the company. Addessi kissed his wife Joan goodbye, but before he could get to his car, he fell dead on the garage floor of a sudden heart attack. Having begun work at IBM at the age of 18, he was just 48 years old.33 You’re the vice president in charge of benefits at IBM. Given that he was four months short of full retirement, do you award full retirement benefits to Mr. Addessi’s wife and daughters? If the answer is yes, they will receive his full retirement benefits of $1,800 a month and free lifetime medical coverage. If you say no, Mrs. Addessi and her daughters will receive only $340 a month. They will also have to pay $473 a month just to continue their current medical
Compliance Program Steps for the U.S. Sentencing Guidelines for Organizations
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coverage. As the VP in charge of benefits at IBM, what would be the ethical thing to do? 4 5
4
After reading the next two sections, you should be able to describe what influences ethical decision making. explain what practical steps managers can take to improve ethical decision making.
INFLUENCES ON ETHICAL DECISION MAKING
So, what did IBM decide to do? Since Richard Addessi was four months short of 30 years with the company, IBM officials felt they had no choice but to give Joan Addessi and her two daughters the smaller, partial retirement benefits. Do you think IBM’s decision was ethical? Probably many of you don’t. You wonder how the company could be so heartless as to deny Richard Addessi’s family the full benefits to which you believe they were entitled. Yet others might argue that IBM did the ethical thing by strictly following the rules laid out in its pension benefit plan. After all, being fair means applying the rules to everyone. Although some ethical issues are easily solved, many do not have clearly right or wrong answers. The ethical answers that managers choose depend on 4.1 the ethical intensity of the decision, 4.2 the moral development of the manager, and 4.3 the ethical principles used to solve the problem.
4.1 Ethical Intensity of the Decision
ethical intensity The degree of concern people have about an ethical issue.
Managers don’t treat all ethical decisions the same. The manager who has to decide whether to deny or extend full benefits to Joan Addessi and her family is going to treat that decision much more seriously than the decision of how to deal with an assistant who has been taking computer paper home for personal use. These decisions differ in their ethical intensity, or the degree of concern people have about an ethical issue. When addressing an issue of high ethical intensity, managers are more aware of the impact their decision will have on others. They are more likely to view the decision as an ethical or moral decision rather than as an economic decision. They are also more likely to worry about doing the “right thing.” Ethical intensity depends on six factors:34 • • • • • •
magnitude of consequences The total harm or benefit derived from an ethical decision.
social consensus Agreement on whether behavior is bad or good.
probability of effect The chance that something will happen and then harm others.
temporal immediacy The time between an act and the consequences the act produces.
magnitude of consequences social consensus probability of effect temporal immediacy proximity of effect concentration of effect.
Magnitude of consequences is the total harm or benefit derived from an ethical decision. The more people who are harmed or the greater the harm to those people, the larger the consequences. Social consensus is agreement on whether behavior is bad or good. Probability of effect is the chance that something will happen and then result in harm to others. If we combine these factors, we can see the effect they can have on ethical intensity. For example, if there is clear agreement (social consensus) that a managerial decision or action is certain (probability of effect) to have large negative consequences (magnitude of effect) in some way, then people will be highly concerned about that managerial decision or action, and ethical intensity will be high. Temporal immediacy is the time between an act and the consequences the act produces. Temporal immediacy is stronger if a manager has to lay off workers
Chapter 4: Ethics and Social Responsibility
next week as opposed to three months from now. Proximity of effect is the social, psychological, cultural, or physical distance of a decision maker from those affected by his or her decisions. Thus, proximity of effect is greater for the manager who works with employees who are to be laid off than it is for a manager who works where no layoffs will occur. Finally, whereas the magnitude of consequences is the total effect across all people, concentration of effect is how much an act affects the average person. Temporarily laying off 100 employees for 10 months without pay is a greater concentration of effect than temporarily laying off 1,000 employees for 1 month. Which of these six factors has the most impact? Studies indicate that managers are much more likely to view decisions as ethical decisions when the magnitude of consequences (total harm) is high and there is a social consensus (agreement) that a behavior or action is bad.35 Many people will likely feel IBM was wrong to deny full benefits to Joan Addessi. Why? In this situation, IBM’s decision met five of the six characteristics of ethical intensity. The difference in benefits (more than $23,000 per year) was likely to have serious consequences for the family. The decision was certain to affect them and would do so immediately. We can closely identify with Joan Addessi and her daughters (as opposed to IBM’s faceless, nameless corporate identity). And the decision would have a concentrated effect on the family in terms of their monthly benefits ($1,800 and free medical coverage if full benefits were awarded versus $340 a month and medical care that costs $473 per month if they weren’t). The exception, as we will discuss below, is social consensus. Not everyone will agree that IBM’s decision was unethical. The judgment also depends on your level of moral development and which ethical principles you use to decide.
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proximity of effect The social, psychological, cultural, or physical distance between a decision maker and those affected by his or her decisions.
concentration of effect The total harm or benefit that an act produces on the average person.
4.2 Moral Development A friend of yours has given you the latest version of Microsoft Office. She stuffed the software disks in your backpack with a note saying that you should install it preconventional level of moral on your computer and get it back to her in a couple of days. You’re tempted. development You have papers to write, notes to take, and presentations to plan. Besides, all The first level of moral development in of your friends have the same version of Microsoft Office. They didn’t pay for which people make decisions based on it either. Copying the software to your hard drive without buying your own selfish reasons. copy clearly violates copyright laws. But no one would find out. Even if some- conventional level of moral one does, Microsoft probably isn’t going to come after you. Microsoft goes af- development ter the big fish—companies that illegally copy and distribute software to their The second level of moral development workers. Your computer has booted up, and you’ve got your mouse in one hand in which people make decisions that conform to societal expectations. and the installation disk in the other. What are you going to do?36 In part, according to Lawrence Kohlberg, your decision will be based on your level of moral development. Kohlberg identified three phases of moral Exhibit 4.4 development, with two stages in each phase (see Exhibit 4.4).37 At the precon- Kohlberg's Stages of Moral ventional level of moral development, people decide based on selfish reasons. For Development example, if you are in Stage 1, the punishment and obedience stage, your primary concern Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6 will be to avoid trouble for yourself. So, you Punishment Instrumental Good Boy, Social Universal Law won’t copy the software because you are and Exchange Nice Girl and Contract Principle afraid of being caught and punished. Yet, in Obedience Order Stage 2, the instrumental exchange stage, you worry less about punishment and more about Preconventional Conventional Postconventional doing things that directly advance your wants and needs. So, you copy the software. Societal Expectations Internalized Principles Selfish People at the conventional level of moral development make decisions that conform to societal expectations. In other words, they Source: W. Davidson III & D. Worrell, “Influencing Managers to Change Unpopular Corporate Behavlook outside themselves to others for guidance ior through Boycotts and Divestitures,” Business & Society 34 (1995): 171–196.
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postconventional level of moral development The third level of moral development in which people make decisions based on internalized principles.
on ethical issues. In Stage 3, the good boy, nice girl stage, you normally do what the other “good boys” and “nice girls” are doing. If everyone else is illegally copying software, you will, too. But if they aren’t, you won’t either. In the law and order stage, Stage 4, you again look for external guidance and do whatever the law permits, so you won’t copy the software. People at the postconventional level of moral development always use internalized ethical principles to solve ethical dilemmas. In Stage 5, the social contract stage, you will refuse to copy the software because, as a whole, society is better off when the rights of others—in this case, the rights of software authors and manufacturers—are not violated. In Stage 6, the universal principle stage, you might or might not copy the software, depending on your principles of right and wrong. Moreover, you will stick to your principles even if your decision conflicts with the law (Stage 4) or what others believe is best for society (Stage 5). For example, those with socialist or communist beliefs would probably choose to copy the software because they believe goods and services should be owned by society rather than by individuals and corporations. (For information about the dos, don’ts, and legal issues concerning software piracy, see the Software & Information Industry Association’s Web site at http://www. siia.net/piracy/default.asp.) Kohlberg believed that as people became more educated and mature, they would progress sequentially from earlier stages to later stages. But only 20 percent of adults ever reach the postconventional stage of moral development where internal principles guide their decisions. By contrast, most adults are in the conventional stage of moral development in which they look outside themselves to others for guidance on ethical issues. This means that most people in the workplace look to and need leadership when it comes ethical decision making.38
4.3 Principles of Ethical Decision Making
principle of long-term self-interest An ethical principle that holds that you should never take any action that is not in your or your organization’s longterm self-interest.
principle of personal virtue An ethical principle that holds that you should never do anything that is not honest, open, and truthful and that you would not be glad to see reported in the newspapers or on TV.
Besides an issue’s ethical intensity and a manager’s level of moral maturity, the particular ethical principles that managers use will also affect how they solve ethical dilemmas. Unfortunately, there is no one “ideal principle” to use in making ethical business decisions. According to Professor Larue Hosmer, a number of different ethical principles can be used to make business decisions: long-term self-interest, personal virtue, religious injunctions, government requirements, utilitarian benefits, individual rights, and distributive justice.39 All of these ethical principles encourage managers and employees to take others’ interests into account when making ethical decisions. At the same time, however, these principles can lead to very different ethical actions, as we can see by using these principles to decide whether to award full benefits to Joan Addessi and her children. According to the principle of long-term self-interest, you should never take any action that is not in your or your organization’s long-term self-interest. Although this sounds as if the principle promotes selfishness, it doesn’t. What we do to maximize our long-term interests (save more, spend less, exercise every day, watch what we eat) is often very different from what we do to maximize shortterm interests (max out our credit cards, be couch potatoes, eat whatever we want). At any given time, IBM has nearly 1,000 employees who are just months away from retirement. Thus, because of the costs involved, it serves IBM’s longterm interest to pay full benefits only after employees have put in their 30 years. The principle of personal virtue holds that you should never do anything that is not honest, open, and truthful and that you would not be glad to see reported in the newspapers or on TV. Using the principle of personal virtue, IBM should have quietly awarded Joan Addessi her husband’s full benefits. Had it done so, it could have avoided the publication of an embarrassing Wall Street Journal article on this topic.
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The principle of religious injunctions holds that you should never take an action that is unkind or that harms a sense of community, such as the positive feelings that come from working together to accomplish a commonly accepted goal. Using this principle, IBM would have been concerned foremost with compassion and kindness. Thus, it would have awarded full benefits to Joan Addessi. According to the principle of government requirements, the law represents the minimal moral standards of society, so you should never take any action that violates the law. Using this principle, IBM would deny full benefits to Joan Addessi because her husband did not work for the company for 30 years. Indeed, an IBM spokesperson stated that making exceptions would violate the federal Employee Retirement Income Security Act of 1974. The principle of utilitarian benefits states that you should never take an action that does not result in greater good for society. In short, you should do whatever creates the greatest good for the greatest number. At first, this principle seems to suggest that IBM should award full benefits to Joan Addessi. If IBM did this with any regularity, however, the costs would be enormous, profits would shrink, and IBM woud have to cut its stock dividend, harming countless shareholders, many of whom rely on IBM dividends for retirement income. So, in this case, the principle does not lead to a clear choice. The principle of individual rights holds that you should never take an action that infringes on others’ agreed-upon rights. Using this principle, IBM would deny Joan Addessi full benefits. If it carefully followed the rules specified in its pension plan and granted Mrs. Addessi due process, meaning the right to appeal the decision, then IBM would not be violating her rights. In fact, it could be argued that providing full benefits to Mrs. Addessi would violate the rights of employees who had to wait 30 years to receive full benefits. Finally, under the principle of distributive justice, you should never take any action that harms the least among us in some way. This principle is designed to protect the poor, the uneducated, and the unemployed. Although Joan Addessi could probably find a job, after 20 years as a stay-at-home mom, it’s unlikely that she could easily find one that would support her and her daughters in the manner to which they are accustomed. Using the principle of distributive justice, IBM would award her full benefits. As mentioned at the beginning of this chapter, one of the “real-world” aspects of ethical decisions is that no matter what you decide, someone or some group will be unhappy. This corollary is also true: No matter how you decide, someone or some group will be unhappy. Consequently, although all of these ethical principles encourage managers to balance others’ needs against their own, they can also lead to very different ethical actions. So, even when managers strive to be ethical, there are often no clear answers when it comes to doing “the” right thing.
Review 4: Influences on Ethical Decision Making Three factors influence ethical decisions: the ethical intensity of the decision, the moral development of the manager, and the ethical principles used to solve the problem. Ethical intensity is strong when decisions have large, certain, immediate consequences and when we are physically or psychologically close to those affected by the decision. There are three phases of moral maturity with two steps within each phase. At the preconventional level, decisions are made for selfish reasons. At the conventional level, decisions conform to societal expectations. At the postconventional level, internalized principles are used to make ethical decisions. Finally, managers can use a number of different principles when making ethical decisions: self-interest, personal virtue, religious injunctions, government requirements, utilitarian benefits, individual rights, and distributive justice.
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prinicple of religious injunctions An ethical principle that holds that you should never take any action that is not kind and that does not build a sense of community.
principle of government requirements An ethical principle that holds that you should never take any action that violates the law, for the law represents the minimal moral standard.
principle of utilitarian benefits An ethical principle that holds that you should never take any action that does not result in greater good for society.
principle of individual rights An ethical principle that holds that you should never take any action that infringes on others’ agreed-upon rights.
principle of distributive justice An ethical principle that holds that you should never take any action that harms the least among us: the poor, the uneducated, the unemployed.
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5
PRACTICAL STEPS TO ETHICAL DECISION MAKING
Managers can encourage more ethical decision making in their organizations by 5.1 carefully selecting and hiring ethical employees, 5.2 establishing a specific code of ethics, 5.3 training employees to make ethical decisions, and 5.4 creating an ethical climate.
5.1 Selecting and Hiring Ethical Employees
THE R IGHT TH G IN IN O G D
If you found a wallet containing $100, would you return it with the money? Informal studies typically show that 57 to 80 percent of people would and that overt integrity test women and people in small towns are more likely to return the wallet with the A written test that estimates job appli- money.40 cants’ honesty by directly asking them As an employer, you can increase your chances of hiring the honest person what they think or feel about theft who returns the wallet with the money if you give job applicants integrity tests. or about punishment of unethical behaviors. Overt integrity tests estimate job applicants’ honesty by directly asking them what they think or feel about theft or about punishment of unethical behavpersonality-based integrity test iors.41 For example, an employer might ask an applicant, “Would you ever A written test that indirectly estimates consider buying something from somebody if you knew the person had job applicants’ honesty by measuring stolen the item?” or “Don’t most people steal from their companies?” Surprispsychological traits such as dependability and conscientiousness. ingly, because they believe that the world is basically dishonest and that dishonest behavior is normal, unethical people will usually answer “yes” to such questions.42 Personality-based integrity tests indirectly estimate job applicants’ honesty by measuring psychological traits IF YOU CHEAT IN COLLEGE, WILL YOU CHEAT IN THE WORKPLACE? such as dependability and conscientiousness. For examStudies show that college students who cheat ple, prison inmates serving time for white-collar crimes once are likely to cheat again. Students who (counterfeiting, embezzlement, and fraud) scored much cheat on exams are likely to cheat on assignlower than a comparison group of middle-level manments and projects. Furthermore, tolerance of agers on scales measuring reliability, dependability, honcheating is widespread, as 70 percent of colesty, conscientiousness, and abiding by rules.43 These lege students don’t see cheating as a problem. results show that companies can selectively hire and Given these relaxed attitudes toward cheating, promote people who will be more ethical.44 For more on and with on-campus cheating at all-time highs, integrity testing, see the “What Really Works” feature employers want to know whether someone who in this chapter. cheated in college will cheat in the workplace. Studies generally indicate that the answer is “yes.” The best predictor of cheating in medical school was cheating in high school or college. Likewise, students who cheated in school were much more likely to cheat on their taxes, in politics (by committing voter fraud or accepting illegal campaign contributions), in sports, and on the job. Why is this the case? Apparently, people who cheat and then cheat again come to see their behavior as normal and to rationalize it by telling themselves that cheating isn’t wrong. In fact, 60 percent of the people who cheat their employers don’t feel guilty about doing so. So, if you want to do the right thing, don’t cheat in college or tolerate cheating by others. Cheating isn’t situation-specific. Once you decide that cheating is acceptable, you’re likely to cheat in most areas of your life.47 Don’t slide down the slippery slope of cheating.
5.2 Codes of Ethics Exhibit 4.5 displays the ethical code of conduct for Portland General Electric, a large electrical utility company, in Portland, Oregon. The code urges employees to conduct themselves as “responsible and responsive corporate citizens,” “respect the environment,” “maintain high levels of legal and ethical conduct,” and “deal honestly and fairly with customers.” Today, 90 percent of large corporations have an ethics code in place, 51 percent have dedicated telephone lines for reporting ethical concerns, and 30 percent have formal ethics and legal compliance offices.45 Still, two things must happen if those codes are to encourage ethical decision making and behavior.46 First, a company must communicate its code to others both inside and outside the company. An excellent example of a well-communicated code of ethics can be found at Nortel Networks’ Internet site at http://www.nortel.com. With the click of a computer mouse, anyone inside or outside the company can obtain detailed information
W H A T
R E A L L Y
W O R K S
Integrity Tests Under the 1991 U.S. Sentencing Commission Guidelines, unethical employee behavior can lead to multimillion dollar fines for corporations. Moreover, workplace deviance like stealing, fraud, and vandalism costs companies an estimated $660 billion a year. One way to reduce workplace deviance and the chances of a large fine for unethical employee behavior is to use overt and personality-based integrity tests to screen job applicants. One hundred eighty-one studies, with a combined total of 576,460 study participants, have examined how well integrity tests can predict job performance and various kinds of workplace deviance. These studies show that not only can integrity tests help companies reduce workplace deviance, but they provide the added bonus of helping companies hire workers who are better performers in their jobs. WORKPLACE DEVIANCE (COUNTERPRODUCTIVE BEHAVIORS)
Compared to job applicants who score poorly, there is an 82 percent chance that job applicants who score well on overt integrity tests will participate in less illegal activity, unethical behavior, drug abuse, or workplace violence. Overt Integrity Tests & Workplace Deviance 10%
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Personality-based integrity tests also do a good job of predicting who will engage in workplace deviance. Compared to job applicants who score poorly, there is a 68 percent chance that job applicants who score well on personality-based integrity tests will participate in less illegal activity, unethical behavior, excessive absences, drug abuse, or workplace violence. Personality-Based Integrity Tests & Workplace Deviance 10%
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JOB PERFORMANCE
In addition to reducing unethical behavior and workplace deviance, integrity tests can help companies hire better performers. Compared to employees who score poorly, there is a 69 percent chance that employees who score well on overt integrity tests will be better performers. Overt Integrity Tests & Job Performance 10%
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The figures are nearly identical for personalitybased integrity tests. Compared to those who score poorly, there is a 70 percent chance that employees who score well on personality-based integrity tests will be better at their jobs. Personality-Based Integrity Tests & Job Performance 10%
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Theft Although integrity tests can help companies decrease most kinds of workplace deviance and increase employees’ job performance, they have a smaller effect on a specific kind of workplace deviance: theft. Compared to employees who score poorly, there is a 57 percent chance that employees who score well on overt integrity tests will be less likely to steal. No theft data were available to assess personality-based integrity tests. Overt Integrity Tests & Theft 10%
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Faking and Coaching on Integrity Tests Although overt and personality-based integrity tests do a very good job of helping companies hire people of higher integrity, it is possible to improve scores on these tests through coaching and faking. Job applicants can be coached by explaining the underlying rationale of an integrity test to them or by giving them specific directions for improving their integrity scores. Faking occurs when applicants simply try to “beat the test” or try to fake a good impression. Unfortunately for the companies that use integrity tests, both strategies work. On average, coaching can improve scores on overt integrity tests by an astounding 1.5 standard deviations and on personality-based integrity tests by a meaningful .36 standard deviations. This would be the equivalent of increasing your total SAT score by 150 and 36 points, respectively (the SAT has a mean of 500 and a standard deviation of 100). Likewise, on average, faking can improve scores on overt integrity tests by an impressive 1.02 standard deviations and on personality-based integrity tests by a meaningful .59 standard deviations. Again, this would be the equivalent of increasing your SAT score by 102 and 59 points, respectively. Companies that want to avoid coaching and faking effects should maintain tight security over integrity tests so that applicants have little information regarding them, periodically check the validity of the tests to make sure they’re accurately predicting workplace deviance and job performance, or periodically switch tests if they suspect that test security has been compromised.48
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One of the characteristics we value highly is the ability to make and keep commitments both to ourselves and to others. People who can make and keep commitments gain respect. They are known for their integrity, and it is the same with businesses. Here is a list of commitments each of us needs to incorporate into our daily conduct of business: • We will treat our fellow employees with honesty, respect, and dignity. • We will strive to conduct our activities to protect the safety and health of our fellow employees. • We will conduct ourselves as responsible and responsive corporate citizens in our communities. • We will respect the environment and exercise good judgment concerning the impact of our activities on the environment. • We will maintain high levels of legal and ethical conduct while pursuing our growth and earnings objectives. • We will deal honestly and fairly with our customers and be responsive to their needs and requirements. • We will strive to maintain the highest standards of excellence in the quality of the products and services we provide to our customers. • We will strive to be the best customer we can be to our suppliers. We will emphasize fairness and integrity in all dealings with suppliers. • We will respect and obey the law.
Exhibit 4.5 Ethical Code of Conduct for Portland General Electric
Source: “Law and Ethics: How We Do Business, A Compliance Guide for Portland General Electric Employees,” Portland General Electric, [Online] available at http://www.portlandgeneral.com/about_pge/jobs/pdf/how_we_do_business.pdf, 20 March 2003.
about the company’s core values, specific ethical business practices, and much more. Second, in addition to having an ethics code with general guidelines like “do unto others as you would have others do unto you,” management must also develop practical ethical standards and procedures specific to the company’s line of business. Visitors to Nortel’s Internet site can instantly access references to very specific ethical standards on topics ranging from bribes and kickbacks to expense vouchers and illegal copying of software. For example, most businesspeople believe that it is wrong to take bribes or other gifts from a company that wants your business. Therefore, one of Nortel’s ethical guidelines is “We do not accept or offer any form of bribe, kickback, improper or illegal inducement—even where the practice is widely considered a way of doing business.”49 And just to be sure there’s no confusion over what constitutes, say, a gift, the guidelines are even more specific: “When we do give or receive gifts, they should be modest. T-shirts, mugs, and pens that carry the company logo are examples of gifts we would normally give or receive. If you give a gift, you must accurately account for it in your expense claim or department records.”50 Specific codes of ethics such as this make it much easier for employees to decide what to do when they want to do the “right thing.”
5.3 Ethics Training The first objective of ethics training is to develop employees’ awareness of ethics.51 This means helping employees recognize which issues are ethical issues and then avoid rationalizing unethical behavior by thinking, “This isn’t really illegal or immoral” or “No one will ever find out.” Several companies have created board games to improve awareness of ethical issues.52 Citigroup has a game called “The Work Ethic,” in which players win or lose points depending on their answers to legal, regulatory, policy, and judgment questions. Defense contractor Lockheed Martin has created “The Ethics Challenge,” which every employee, including the CEO, must play at least once a year. Lockheed workers
sit around a table, roll dice, and then move their tokens ahead when they answer ethics questions correctly. Here’s a sample question from the game: A kickback may be in the form of: A. B. C. D.
Cash Gift to a family member Donation to a charity at your request All of these (the correct answer)
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The game has been very popular, except for one year when it was revised so that it did not indicate which answers were right. Brian Sears, an ethics officer for Lockheed’s aeronautics division, commented that engineers, who are used to “correct answers,” wanted more guidance. Said Sears, “They had a hard time with it,” so the game was changed again to offer “preferred answers.”53 BellSouth’s “Ethics Scenarios” game, which is similar, is available online. To play it, go to http://ethics.bellsouth.com/ and search for “Ethics Scenarios Game.” The second objective for ethics training programs is to achieve credibility with employees. Not surprisingly, employees can be highly suspicious of management’s reasons for offering ethics training. Some companies have hurt the credibility of their ethics programs by having outside instructors and consultants conduct the classes.54 Employees often complain that outside instructors and consultants are teaching theory that has nothing to do with their jobs and the “real world.” This is why Boeing has a vice president of ethics who employs 55 people to teach Boeing’s 194,000 employees the difference between right and wrong in the aerospace industry.55 Ethics training becomes even more credible when top managers teach the initial ethics classes to their subordinates, who in turn teach their subordinates. In time, most managers will have taken and taught the ethics classes, thereby pushing ethics training and principles throughout the entire company.56 Unfortunately, though, 25 percent of large companies don’t require top managers to attend, much less teach, ethics training.57 The third objective of ethics training is to teach employees a practical model of ethical decision making. A basic model should help them think about the consequences their choices will have on others and consider how they will choose between different solutions. Exhibit 4.6 presents a basic model of ethical decision making.
5.4 Ethical Climate In study after study, when researchers ask, “What is the most important influence on your ethical behavior at work?” the answer comes back, “My manager.” The first step in establishing an ethical climate is for managers, especially top managers, to act ethically themselves. The National Business Ethics Survey found that unethical misconduct occurred in just 15 percent of the organizations where top managers talked about the importance of ethics, kept their promises to others, and modeled ethical behavior themselves. By contrast, unethical misconduct occurred in 56 percent of the organizations in which top management only talked about the importance of ethics, but did nothing else.58 A second step in establishing an ethical climate is for top management to be active in and committed to the company ethics program.59 Top managers who
In an effort to ensure that employees know how to act in an ethical manner, many companies have a code of ethics or ethical guidelines. Companies from Boeing to Tower Records use games to practice ethical decision making. There is even a game based on the popular cartoon character, Dilbert.
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1. Identify the problem. What makes it an ethical problem? Think in terms of rights, obligations, fairness, relationships, and integrity. How would you define the problem if you stood on the other side of the fence? 2. Identify the constituents. Who has been hurt? Who could be hurt? Who could be helped? Are they willing players, or are they victims? Can you negotiate with them? 3. Diagnose the situation. How did it happen in the first place? What could have prevented it? Is it going to get worse or better? Can the damage now be undone? 4. Analyze your options. Imagine the range of possibilities. Limit yourself to the two or three most manageable. What are the likely outcomes of each? What are the likely costs? Look to the company mission statement or code of ethics for guidance. 5. Make your choice. What is your intention in making this decision? How does it compare with the probable results? Can you discuss the problem with the affected parties before you act? Could you disclose without qualm your decision to your boss, the CEO, the board of directors, your family, or society as a whole? 6. Act. Do what you have to do. Don’t be afraid to admit errors. Be as bold in confronting a problem as you were in causing it. Source: L. A. Berger, “Train All Employees to Solve Ethical Dilemmas,” Best’s Review—Life-Health Insurance Edition 95 (1995): 70–80.
Exhibit 4.6 A Basic Model of Ethical Decision Making
whistlebowling Reporting others’ ethics violations to management or legal authorities.
consistently talk about the importance of ethics and back up that talk by participating in their companies’ ethics programs send the clear message that ethics matter. Business writer Dayton Fandray says, “You can have ethics offices and officers and training programs and reporting systems, but if the CEO doesn’t seem to care, it’s all just a sham. It’s not surprising to find that the companies that really do care about ethics make a point of including senior management in all of their ethics and compliance programs.”60 A third step is to put in place a reporting system that encourages managers and employees to report potential ethics violations. Whistleblowing, that is, reporting others’ ethics violations, is a difficult step for most people to take.61 Potential whistleblowers often fear that they, and not the ethics violators, will be punished.62 Managers who have been interviewed about whistleblowing have said, “In every organization, someone’s been screwed for standing up.” “If anything, I figured that by taking a strong stand I might get myself in trouble. People might look at me as a ‘goody two shoes.’ Someone might try to force me out.” This is exactly what happened to Sandy Baratta, who used to be a vice president at Oracle, which makes database software used by most large companies. Baratta was fired, she alleges, for complaining about Oracle’s treatment of women and unethical business practices. Under California’s whistleblower protection laws, a jury awarded her $2.6 million in damages.63 Today, many federal and state laws protect the rights of whistleblowers (see http://www.whistleblowers.org for more information). In particular, the Sarbanes-Oxley Act of 2002 (see http://www.aicpa.org/info/sarbanes_oxley_ summary.htm) made it a serious crime to retaliate in any way against corporate whistleblowers in publicly owned companies. Managers who punish whistleblowers can be imprisoned for up to 10 years. Some companies, including defense contractor Northrup Grumman, have made it easier for whistleblowers to report possible violations by establishing anonymous, toll-free corporate ethics hot lines. Nortel Networks even publicizes which of its ethics hot lines don’t have caller ID (so they can’t identify the caller’s phone number). The Sarbanes-Oxley Act also requires all publicly held companies to establish anonymous hot lines to encourage reporting of unethical and illegal behaviors. The factor that does the most to discourage whistleblowers from reporting problems, however, is lack of company action on their complaints.64 Thus, the final step in developing an ethical climate is for management to fairly and consistently punish those who violate the company’s code of ethics. For example,
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when an anonymous caller used hospital chain Columbia\HCA’s toll-free ethics phone line to report that a supply clerk was stealing medical equipment and selling it online at eBay.com the information was forwarded to company investigators who then bought the equipment on eBay. Being a good eBay seller, the supply clerk quickly shipped the stolen goods directly from her home. When confronted with the stolen goods, she confessed and was immediately fired.65 Amazingly, though, not all companies fire ethics violators. In fact, 8 percent of surveyed companies admit that they’d promote top performers even if they violated ethical standards. 66
Review 5: Practical Steps to Ethical Decision Making Employers can increase their chances of hiring ethical employees by administering overt integrity tests and personality-based integrity tests to all job applicants. Most large companies now have corporate codes of ethics. To affect ethical decision making, these codes must be known both inside and outside the organization. In addition to offering general rules, ethics codes must also provide specific, practical advice. Ethics training seeks to increase employees’ awareness of ethical issues, make ethics a serious, credible factor in organizational decisions, and teach employees a practical model of ethical decision making. The most important factors in creating an ethical business climate are the personal examples set by company managers, involvement of management in the company ethics program, a reporting system that encourages whistleblowers to report potential ethics violations, and fair but consistent punishment of violators.
What Is Social Responsibility?
social responsibility
Social responsibility is a business’s obligation to pursue policies, make deci-
©PEOPLE FOR THE ETHICAL TREATMENT OF ANIMALS (PETA)
sions, and take actions that benefit society.67 Unfortunately, because there are strong disagreements over to whom and for what in society organizations are responsible, it can be difficult for managers to know what is or will be perceived as socially responsible corporate behavior. For example, Procter & Gamble (P&G) no longer uses animals, such as rats and rabbits, to test the safety of its cosmetics, shampoos, detergents, cleansers, and paper goods, although it continues to use animals to test the safety of new drugs and healthcare products.68 Nonetheless, P&G still draws protests from PETA (People for the Ethical Treatment of Animals) in the form of PETA’s “Died” advertising campaign, which is based on P&G’s best-selling laundry detergent Tide. The “Died” ad shows a woman holding a box of “Died” detergent with the words “Thousands of Animals Died for Your Laundry” on the box. PETA is urging consumers to boycott all P&G products until the company ends all forms of animal testing. In response, P&G argues that eliminating animal testing altogether would be socially irresponsible because testing is critical to producing safe products for its customers. The company’s Web site states: “We have to know, for example, that a product will not cause injury if a child accidentally swallows it or gets it into their eyes.”69 Furthermore, in the event that a product liability lawsuit is filed against the company, its best legal defense would be the scientific testing it performs on rats and rabbits.70 Finally, P&G points out that it has been actively developing alternatives to animal testing. Dr. Martin Stephens, vice president for animal research issues at the U.S. Humane Society, says,
A business’s obligation to pursue policies, make decisions, and take actions thaat benefit society.
There is no single definitive understanding of social responsibility, as the dispute between P&G and PETA proves. Many argue that P&G is being socially responsible by continuing limited animal testing for health-care products to ensure the safety of future customers, including babies and children. Others, like PETA, argue that P&G is acting irresponsibly by continuing animal testing at all.
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“P&G has perhaps done more than any other corporation to speed the development and acceptance of alternative test methods.”71 Is P&G obligated, as PETA believes, to eliminate all animal testing? Or, by minimizing but not eliminating animal testing has P&G achieved a reasonable balance that still allows it to make sure its products are safe? In the end, are P&G’s actions regarding animal testing socially responsible or irresponsible? 6 7 8 9
6
shareholder model A view of social responsibility that holds that an organization’s overriding goal should be profit maximization for the benefit of shareholders.
After reading the next four sections, you should be able to explain to whom organizations are socially responsible. for what organizations are socially responsible. how organizations can choose to respond to societal demands for social responbility. whether social responsibility hurts or helps an organization’s economic performance.
TO WHOM ARE ORGANIZATIONS SOCIALLY RESPONSIBLE?
There are two perspectives as to whom organizations are socially responsible: the shareholder model and the stakeholder model. According to Nobel Prize–winning economist Milton Friedman, the only social responsibility that organizations have is to satisfy their owners, that is, company shareholders. This view—called the shareholder model—holds that the only social responsibility that businesses have is to maximize profits. By maximizing profit, the firm maximizes shareholder wealth and satisfaction. More specifically, as profits rise, the company stock owned by shareholders generally increases in value. For example, over the last decade, Dell, Inc., founded by Michael Dell in his dorm room at the University of Texas, has given its shareholders an average annual return of 58.8 percent, by far the highest among Fortune 500 companies.72 If you had invested $1,000 in Dell 10 years ago, that money would now be worth $101,978!73 (This figure does not include stock splits. When stock prices get high, companies split the stock. For example, if a stock costs $200, and the company splits the stock, one $200 share of stock becomes two shares of stock, each worth $100.) Friedman argues that it is socially irresponsible for companies to divert time, money, and attention from maximizing profits to social causes and charitable organizations. The first problem he sees is that organizations cannot act effectively as moral agents for all company shareholders. Although shareholders are likely to agree on investment issues concerning a company, it’s highly unlikely that they have common views on what social causes a company should or should not support. For example, corporate donations to the Boy Scouts dropped significantly after the U.S. Supreme Court ruled 5–4 that the Boy Scouts do not have to accept homosexual troop leaders. J. P. Morgan Chase, Levi-Strauss & Company, Textron, and Wells Fargo have all stopped donating to the Boy Scouts. Tom Unger of Wells Fargo explained, “The Boy Scouts are as American as apple pie, but this was an easy decision to make. We really have to, as a company, return to what our core vision and values are, and that’s to not discriminate.” Yet, while corporate donations are down, overall donations to the Boy Scouts have risen.74 Rather than act as moral agents, Friedman argues, companies should maximize profits for shareholders. Shareholders can then use their time and increased wealth to contribute to the social causes, charities, or institutions they want, rather than those that companies want. The second major problem, according to Friedman, is that the time, money, and attention diverted to social causes undermine market efficiency.75 In competitive markets, companies compete for raw materials, talented workers, customers, and investment funds. A company that spends money on social causes will have less money to purchase quality materials or to hire talented workers who can produce a valuable
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product at a good price. If customers find the company’s PRIMARY STAKEHOLDERS: product less desirable, its sales SECONDARY STAKEHOLDERS and profits will fall. If profits SECONDARY fall, the company’s stock price STAKEHOLDERS: will decline, and the company PRIMARY STAKEHOLDERS will have difficulty attracting investment funds that could be Governments used to fund long-term growth. Local In the end, Friedman argues, diCommunities Suppliers verting the firm’s money, time, and resources to social causes hurts customers, suppliers, emSpecial Interest FIRM ployees, and shareholders. Groups By contrast, under the stakeholder model, manageMedia Shareholders ment’s most important responCustomers sibility is the firm’s long-term Employees survival (not just maximizing profits), which is achieved by satisfying the interests of multiple corporate stakeholders (not just shareholders).76 Trade Associations Stakeholders are persons or groups with a legitimate interest in a company.77 Since Republished with permission of Academy of Management, P.O. Box 3020, Briar Cliff Manor, NY, 10510-8020. “The stakeholders are interested in Source: Stakeholder Theory of the Corporation: Concepts, Evidence and Implications” (Figure), T. Donaldson & L. E. Preston, Academy and affected by the organiza- of Management Review. 1995, Vol. 20. Reproduced by permission of the publisher via Copyright Clearance Center, Inc. tion’s actions, they have a “stake” in what those actions are. Consequently, stakeholder groups may try to Exhibit 4.7 Stakeholder Model of Corporate influence the firm to act in their own interests. Exhibit 4.7 shows the various Social Responsibility stakeholder groups that the organization must satisfy to assure its long-term survival. stakeholder model Being responsible to multiple stakeholders raises two basic questions. First, A theory of corporate responsibility how does a company identify organizational stakeholders? Second, how does a that holds that management’s most company balance the needs of different stakeholders? Distinguishing between important responsibility, long-term survival, is achieved by satisfying the primary and secondary stakeholders can answer these questions.78 Some stakeholders are more important to the firm’s survival than others. interests of multiple corporate stakeholders. Primary stakeholders are groups on which the organization depends for its long-term survival; they include shareholders, employees, customers, suppliers, stakeholders governments, and local communities. So, when managers are struggling to bal- Persons or groups with a “stake” or interest in a company’s ance the needs of different stakeholders, the stakeholder model suggests that the legitimate actions. needs of primary stakeholders take precedence over the needs of secondary stakeholders. In theory, no primary stakeholder group is more or less important primary stakeholder than another, because all are said to be critical to the organization’s long-term Any group on which an organization success and survival. In practice, though, CEOs typically give somewhat higher relies for its long-term survival. priority to shareholders, employees, and customers than to suppliers, governments, and local communities.79 Exhibit 4.8 lists issues that organizations will probably have to address to keep their primary stakeholders satisfied. Addressing the concerns of primary stakeholders is important because if a stakeholder group becomes dissatisfied and terminates its relationship with the company, the company could be seriously harmed or go out of business. With 4,300 drugstores, Walgreen’s was one of Kodak’s key customers (i.e., stakeholders), selling two billion photo prints a year using Kodak paper and photo minilab machines. But with the growing popularity of digital photography, Kodak lost billions in sales because its film and film chemicals were no longer needed
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Company
Company history, industry background, organization structure, economic performance, competitive environment, mission or purpose, corporate codes, stakeholder and social issues management systems.
Employees
Benefits, compensation and rewards, training and development, career planning, employee assistance programs, health promotion, absenteeism and turnover, leaves of absence, relationships with unions, dismissal and appeal, termination, layoffs, retirement and termination counseling, employment equity and discrimination, women in management and on the board, day care and family accommodation, employee communication, occupational health and safety, and part-time, temporary, or contract employees.
Shareholders
Shareholder communications and complaints, shareholder advocacy, shareholder rights, and other shareholder issues.
Customers
Customer communications, product safety, customer complaints, special customer services, and other customer issues.
Suppliers
Relative power, general policy, and other supplier issues.
Public Stakeholders
Public health, safety, and protection, conservation of energy and materials, environmental assessment of capital projects, other environmental issues, public policy involvement, community relations, social investment and donations.
Source: M. B. E. Clarkson, “A Stakeholder Framework for Analyzing and Evaluating Corporate Social Performance,” Academy of Management Review 20 (1995): 92–117.
Exhibit 4.8 Issues Important to Primary Stakeholders
secondary stakeholder Any group that can influence or be influenced by a company and can affect public perceptions about its socially responsible behavior.
to make photos. Hoping to recapture lost sales, Kodak started Ofoto (http://www.ofoto.com), a Web site where customers can upload digital pictures to the Internet, view them, and then order prints directly from Kodak. Walgreen executives saw that Ofoto would cut them out of the print business. So, even though it still had a $200 million agreement with Kodak, Walgreen installed 1,500 one-hour photo minilab machines (for traditional film prints) and digital photo kiosks (for digital film prints) from Fuji, Kodak’s main competitor, and it plans to install 800 more. As Walgreen’s Gordon Addington observed, “You have to earn your way in, but you also have to earn your way out . . . Kodak did its best to earn its way out.”80 Walgreen’s switch to Fuji will cost Kodak $500 million a year in sales. Secondary stakeholders, such as the media and special interest groups, can influence or be influenced by the company. Unlike the primary stakeholders, however, they do not engage in regular transactions with the company and are not critical to its long-term survival. Consequently, meeting the needs of primary stakeholders is usually more important than meeting the needs of secondary stakeholders. Nevertheless, secondary stakeholders are still important because they can affect public perceptions and opinions about socially responsible behavior. For instance, after hundreds of protests by environmental groups at its stores and headquarters, Home Depot agreed to quit buying lumber products from “old growth” trees in endangered forests. Worried that the protests would hurt sales, Home Depot even began encouraging foreign governments and loggers to stop environmentally unsound practices. When its Indonesian wood supplier used slash-and-burn methods to harvest huge sections of rain forest, Home Depot cut its purchases of Indonesian lumber by 90 percent. Ron Jarvis, Home Depot’s environmental global project manager, said, “We asked them to stop and they said they would continue.”81 As a result of these actions, the protests against Home Depot have stopped. So, to whom are organizations socially responsible? Many commentators, especially economists and financial analysts, continue to argue that organizations are responsible only to shareholders. Increasingly, however, top managers have come to believe that they and their companies must be socially responsible to their stakeholders. This view has gained adherents since the Great Depression, when General Electric first identified shareholders, employees, customers, and the general public as its stakeholders. In 1947, Johnson & Johnson listed
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customers, employees, managers, and shareholders as its stakeholders; and in 1950, Sears Roebuck announced that its most important stakeholders were “customers, employees, community, and stockholders.”82 Today, surveys show that as many as 80 percent of top-level managers believe that it is unethical to focus just on shareholders. Twenty-nine states have changed their laws to allow company boards of directors to consider the needs of employees, creditors, suppliers, customers, and local communities, as well as those of shareholders.83 So, although there is not complete agreement, a majority of opinion makers would argue that companies must be socially responsible to their stakeholders.
Review 6: To Whom Are Organizations Socially Responsible? Social responsibility is a business’s obligation to benefit society. To whom are organizations socially responsible? According to the shareholder model, the only social responsibility that organizations have is to maximize shareholder wealth by maximizing company profits. According to the stakeholder model, companies must satisfy the needs and interests of multiple corporate stakeholders, not just shareholders. However, the needs of primary stakeholders, on which the organization relies for its existence, take precedence over those of secondary stakeholders. 7
FOR WHAT ARE ORGANIZATIONS SOCIALLY RESPONSIBLE?
If organizations are to be socially responsible to stakeholders, for what are they to be socially responsible? As Exhibit 4.9 illustrates, companies can best benefit their stakeholders by fulfilling their economic, legal, ethical, and discretionary Exhibit 4.9 Social Responsibilities
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Source: Republished with permission of Academy of Management, P.O. Box 3020, Briar Cliff Manor, NY, 10510-8020. “A Three-Dimensional Conceptual Model of Corporate Performance.” (Figure 3.3) A. B. Carroll, Academy of Management Review, 1979, Vol. 4. Reproduced by permission of the publisher via Copyright Clearance Center, Inc.
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economic responsibility The expectation that a company will make a profit by producing a valued product or service.
legal responsibility The expectation that a company will obey society’s laws and regulations.
ethical responsibility The expectation that a company will not violate accepted principles of right and wrong when conducting its business.
discretionary responsibilities The expectation that a company will voluntarily serve a social role beyond its economic, legal, and ethical responsibilities.
responsibilities.84 Exhibit 4.9 indicates that economic and legal responsibilities play a larger part in a company’s social responsibility than do ethical and discretionary responsibilities. However, the relative importance of these various responsibilities depends on society’s expectations of corporate social responsibility at a particular point in time.85 A century ago, society expected businesses to meet their economic and legal responsibilities and little else. Today, when society judges whether businesses are socially responsible, ethical and discretionary responsibilities are considerably more important than they used to be. Historically, economic responsibility, making a profit by producing a product or service valued by society, has been a business’s most basic social responsibility. Organizations that don’t meet their financial and economic expectations come under tremendous pressure. For example, company boards are very, very quick these days to fire CEOs. Typically, all it takes is two or three bad quarters in a row. Thomas Neff, who heads the executive recruiting firm Spencer Stuart, says, “It used to be a couple of years [and not two or three quarters].” William Rollnick, who became acting chairman of Mattel after the company fired its previous CEO, says, “There’s zero forgiveness. You screw up and you’re dead.”86 Indeed, in both Europe and the United States, nearly one-third of all CEOs are fired because of their inability to successfully change their companies.87 In fact, CEOs are three times more likely to be fired today than two decades ago. Legal responsibility is the expectation that companies will obey society’s laws and regulations as they try to meet their economic responsibilities. For example, under the 1990 Clean Air Act, the smell of fresh baked bread is now illegal. Actually, it’s not the smell that is illegal, but the ethanol that is emitted when bread is baked.88 Although ethanol itself is nontoxic, it contributes to pollution by promoting the formation of the harmful atmospheric compound ozone. Consequently, to meet the law, large bakery plants spent millions to purchase catalytic oxidizers that remove ethanol emissions.89 Ethical responsibility is society’s expectation that organizations will not violate accepted principles of right and wrong when conducting their business. For example, most people believe that KFC was wrong to run ads implying that its fried chicken was good for you and could help you lose weight. In one ad, one friend said to another, “Is that you? Man you look fantastic! What the heck you been doin’?” With his mouth full, the friend says, “Eatin’ chicken.” At voiceover then says, “So if you’re watching carbs and going high protein, go KFC!” Pointing out that two fried chicken breasts contain 780 calories and 38 grams of fat, marketing consultant Marian Salzman said, “Marketers need to understand that you can’t ask people to believe what isn’t true.”90 Likewise, Michael Jacobsen, executive director of the Center for Science in the Public Interest said, “These ads take the truth, dip it in batter and deep-fry it. Colonel Sanders himself would have a hard time swallowing this ad campaign.”91 After running the ads for a brief time, KFC quietly pulled them. Because different stakeholders may disagree about what is or is not ethical, meeting ethical responsibilities is more difficult than meeting economic or legal responsibilities. Discretionary responsibilities pertain to the social roles that businesses play in society beyond their economic, legal, and ethical responsibilities. For example, dozens of companies support the fight against hunger at The Hunger Site, http://www.thehungersite.com. Each time someone clicks on the “donate free food” button (only one click per day per visitor), sponsors of The Hunger Site donate money to pay for food to be sent to Bosnia, Indonesia, Mozambique, or wherever people suffer from hunger. Thanks to the corporate sponsors and 284 million visitors’ “clicks,” almost 400 million cups (nearly 49 million pounds) of food have been distributed thus far.92 Discretionary responsibilities such as these are voluntary. Companies are not considered unethical if they don’t perform them. Today, however, corporate stakeholders expect companies to do much more than in the past to meet their discretionary responsibilities.
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Review 7: For What Are Organizations Socially Responsible? Companies can best benefit their stakeholders by fulfilling their economic, legal, ethical, and discretionary responsibilities. Being profitable, or meeting one’s economic responsibility, is a business’s most basic social responsibility. Legal responsibility consists of following a society’s laws and regulations. Ethical responsibility means not violating accepted principles of right and wrong when doing business. Discretionary responsibilities are social responsibilities beyond basic economic, legal, and ethical responsibilities. 8
RESPONSES TO DEMANDS FOR SOCIAL RESPONSIBILITY
Social responsiveness is the strategy chosen by a company to respond to stake-
social responsiveness
holders’ economic, legal, ethical, or discretionary expectations concerning The strategy chosen by a company to social responsibility. A social responsibility problem exists whenever company respond to stakeholders’ economic, legal, ethical, or discretionary actions do not meet stakeholder expectations. One model of social responsive- expectations concerning social ness, shown in Exhibit 4.10, identifies four strategies for responding to social responsibility. responsibility problems: reactive, defensive, accommodative, and proactive. These strategies differ in the extent to which the company is willing to act to meet or exceed society’s expectations. A company using a reactive strategy will do less than society expects. It may reactive strategy deny responsibility for a problem or fight any suggestions that the company A social responsiveness strategy in should solve a problem. For example, in an attempt to treat all charitable insti- which a company does less than society expects. tutions the same way, Target created a problem by banning Salvation Army bell ringers with their red kettles from soliciting donations in front of its stores during the holiday season. A Target spokesperson said that because other nonprofit organizations made similar requests, “It’s becoming increasingly difficult to have an exception to our policy, so we decided we would have no exceptions.” Customer Phyllis McElaney spoke for many when she said this about Target’s ban: “It’s a disgrace. The bell ringers remind you of the meaning of Christmas, that it’s about love, caring, and giving.”93 The ban also meant that the Salvation Army would have to find a way to replace the $9 million that Target customers typically donated each year. By contrast, Wal-Mart again welcomed the Salvation Army’s bell ringers to its stores and pledged to match its customers’ donations up to a total of $1 million.94 By contrast, a company using a defensive strategy would admit responsibil- defensive strategy ity for a problem but would do the least required to meet societal expectations. A social responsiveness strategy in Second Chance Body Armor makes bulletproof vests for police officers. which a company admits responsibility for a problem but does the least According to company founder Richard Davis, tests indicated that the protec- required to meet societal tive material in its vests deteriorated quickly under high temperatures and expectations. humidity, conditions under which they’re typically used. As a result, Davis concluded that vests no more than two years old were potentially unsafe. Nev- Exhibit 4.10 Social Responsiveness ertheless, he couldn’t convince the company’s executive committee to reDefensive Accommodative Proactive call the vests (an accomodative strat- Reactive egy). Davis says he told the committee Fight all Do only what Be Lead the that it had three choices: recall the the way is required progressive industry vests and stop selling them, do nothing and wait “until a customer is injured Public Legal Problem Withdrawal Relations Bargaining or killed,” or wait until the problem Approach Solving Approach becomes public and “be forced to make excuses as to why we didn’t recognize and correct the problem.”95 DO DO After two vests were pierced by bulNOTHING MUCH lets, killing one police officer and Source: Republished with permission of Academy of Management, P.O. Box 3020, Briar Cliff Manor, NY, 10510wounding another, Second Chance an- 8020. “A Three-Dimensional Conceptual Model of Corporate Performance.” (Figure 3.3) A. B. Carroll, Academy of nounced that it would fix or replace Management Review, 1979, Vol. 4. Reproduced by permission of the publisher via Copyright Clearance Center, Inc.
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accommodative strategy A social responsiveness strategy in which a company accepts responsibility for a problem and does all that society expects to solve that problem.
proactive strategy A social responsiveness strategy in which a company anticipates responsibility for a problem before it occurs and does more than society expects to address the problem.
130,000 potentially defective vests. Although the company finally admitted responsibility for the problem, management decided to do only the minimum of what society expects (fix a defective product). Second Chance, therefore, used a defensive strategy. A company using an accommodative strategy will accept responsibility for a problem and take a progressive approach by doing all that could be expected to solve the problem. For example, when the Malden Mills textiles manufacturing plant burned to the ground just before Christmas, owner Aaron Feuerstein did not close the plant, lay off workers, and take a $300 million insurance settlement. Instead, he promised his 3,000 workers that they would still have jobs. As the plant was being rebuilt, Feuerstein met his weekly payroll of $1.5 million and covered the medical expenses of 33 injured workers. Despite the insurance settlement, the company had to borrow significant funds to rebuild the factory. Still, Feuerstein felt he did the “right thing.” Feuerstein said, “It’s the right thing to do because I think a business, yes, must maximize the profitability to the shareholder, but it means something more than that. There’s a right way to treat employees, to treat them with respect, not as a pair of hands, and to give them the loyalty and trust that they expect and to treat them as human beings.”96 Finally, a company using a proactive strategy will anticipate responsibility for a problem before it occurs, do more than expected to address the problem, and lead the industry in its approach. Honda Motors announced that it will include side-curtain air bags (that drop from the roof and protect passengers’ heads) and front-side air bags (that come out of the door to protect against side-impact collisions) as standard equipment on all of its cars. Although more expensive car brands, such as Lexus and Volvo, already included these safety features, Honda is the first to make them standard on all models. On most other cars, these features are optional, meaning that customers must pay extra for them. Brian O’Neill of the Insurance Institute for Highway Safety says, “This is a very positive development because we have been troubled by more and more manufacturers going the option route when it comes to safety equipment.” Charlie Baker, Honda’s vice president for U.S. research and development, says, “We are convinced this is the right direction and will save lives.”97
Review 8: Responses to Demands for Social Responsibility Social responsiveness is a company’s response to stakeholders’ demands for socially responsible behavior. There are four social responsiveness strategies. When a company uses a reactive strategy, it denies responsibility for a problem. When it uses a defensive strategy, it takes responsibility for a problem but does the minimum required to solve it. When a company uses an accommodative strategy, it accepts responsibility for problems and does all that society expects to solve them. Finally, when a company uses a proactive strategy, it does much more than expected to solve social responsibility problems. 9
SOCIAL RESPONSIBILITY AND ECONOMIC PERFORMANCE
One question that managers often ask is, “Does it pay to be socially responsible?” Though understandable, asking whether social responsibility pays is a bit like asking if giving to your favorite charity will help you get a better-paying job. The obvious answer is no. There is not an inherent relationship between social responsibility and economic performance.98 Nevertheless, this doesn’t stop supporters of corporate social responsibility from claiming a positive relationship. For example, one study shows that the Domini 400 Social Index, which is a stock fund consisting of 400 socially responsible companies, has outperformed the Standard & Poor’s 500 (an index of 500 stocks representative of the entire economy) by nearly 5 percent. At the same time, though, critics have plenty of facts to support their claim that social responsibility hurts economic
Chapter 4: Ethics and Social Responsibility
performance. For example, another study of 42 socially responsible mutual funds found that they underperformed the Standard & Poor’s 500 by 8 percent.99 When it comes to social responsibility and economic performance, the first reality is that being socially responsible can sometimes cost a company significantly. Boston-based Timberland, which makes an assortment of work and outdoor clothing and shoes, gives each of its employees a paid (yes, paid) week off each year to help local charities. For example, vice president Bonnie Monahon took four days off to organize a bike-a-thon that raised $50,000 to fight childhood cancer. Monahon, whose younger brother died from cancer, says, “Not too many companies will allow you to do this kind of stuff.”100 Each year, Timberland also gives four workers six months of paid leave so that they can work fulltime for nonprofit organizations. Finally, Timberland closes the entire company for one day each year so that all of its 5,400 workers can spend the day working on charitable projects sponsored by the company. This commitment to giving back doesn’t come cheap. Indeed, closing down for one day costs Timberland $2 million. Furthermore, assuming that the average employee makes $50,000 a year, then the cost of giving each employee a paid week off to do charitable work is at least $5 million. That’s $7 million a year that doesn’t go to Timberland’s bottom line. The second reality of social responsibility and economic performance is that sometimes it does pay to be socially responsible. The mission of Worldwise, which sells environmentally friendly consumer products, is “to make environmentally responsible products that work as well or better, look as good or finer, and cost the same or less as the competition.” For example, its water bowls for pets are made out of 125 recycled bottle caps. Likewise, its ecoplanter, which looks like a heavy, terra-cotta planter, is light, cheap, and made from 100 percent recycled plastic. In short, Worldwise doesn’t think you should have to pay more for environmentally friendly products. In fact, its products are priced competitively enough to be sold in Wal-Mart, Target, and Home Depot. CEO Aaron Lamstein says, “Part of our concept is that we must have an incredibly focused mission that includes equally environmental and social issues and economic issues—that is, making sure that we have a really solid, healthy, financially secure business. You can’t put one in front of the other. You can’t be successful if you can’t do both.” The company, which is only 13 years old, has been profitable each of the last eight years.101 The third reality of social responsibility and economic performance is that although socially responsible behavior may be “the right thing to do,” it does not guarantee profitability. Socially responsible companies experience the same ups and downs in economic performance that traditional businesses do. A good example is Ben & Jerry’s Homemade Ice Cream. Ben & Jerry’s started in 1978 when founders Ben Cohen and Jerry Greenfield sent away for a $5 course on how to make ice cream. Ben & Jerry’s is as famous for its commitment to being socially responsible as for its super premium ice cream. Ben & Jerry’s donates 7.5 percent of its pretax profits to support AIDS patients, the homeless, and the environment.102 Moreover, customers buy Ben & Jerry’s ice cream because it tastes great and because they want to support a socially responsible company. As Ben Cohen says, “We see ourselves as somewhat of a social service agency and somewhat of an ice cream company.”103 But, and this is a big but, despite its outstanding reputation as a socially responsible company, Ben & Jerry’s consistently had financial troubles after going public (selling shares of stock to the public) a decade ago. In fact, its financial problems became so severe that Ben and Jerry sold the company to British-based Unilever.104 Being socially responsible may be the “right thing to do,” but it doesn’t guarantee business success. While Ben & Jerry’s struggled, Seattle-based Starbucks Coffee, which also markets itself as a socially responsible company, grew from 11 to more than
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8,337 gourmet coffee shops worldwide. (Starbucks had over 9,200 stores at the time of publication. By the time you read this, there are sure to be many more.) Starbucks pays its coffee shop workers much more than minimum wage, provides full health insurance coverage to anyone who works at least 20 hours a week, and gives employees with six or more months at the company the chance to participate in its stock options program. Besides taking good care of its employees, Starbucks also makes an annual six-figure charitable contribution to CARE, an international relief agency, for feeding, clothing, and educating the poor in the coffee-growing regions where it gets its coffee beans.105 Workers from its thousands of stores worldwide are paid to volunteer in community service programs, such as Earth Day cleanups, regional AIDS walks, and local literacy organizations. For example, Starbucks workers in its 19 New Zealand stores donate about 100 hours of volunteer work each week. Aasha Murthy, Starbucks’ general manager in New Zealand, says, “Any company can write out a check to a worthy cause, send it off, and think nothing more of it, but that isn’t what Starbucks is about. We’ve got an enormous amount of talent, energy, and passion in our business and that comes from our staff. So we decided to donate their skills. We want Starbucks New Zealand to be a successful organization, not just a profitable one, and there’s more than one dimension to success. We want to reach out to the community we’re part of.”106 In the end, if company management chooses a proactive or accommodative strategy toward social responsibility (rather than a defensive or reactive strategy), it should do so because it wants to benefit society and its corporate stakeholders, not because it expects a better financial return.
Review 9: Social Responsibility and Economic Performance Does it pay to be socially responsible? Sometimes it costs, and sometimes it pays. Overall, there is no clear relationship between social responsibility and economic performance. Consequently, managers should not expect an economic return from socially responsible corporate activities. If your company chooses to practice a proactive or accommodative social responsibility strategy, it should do so to better society and not to improve its financial performance.
Key Terms accommodative strategy, 124 concentration of effect, 109 conventional level of moral development, 109 defensive strategy, 123 discretionary responsibilities, 122 economic responsibility, 122 employee shrinkage, 103 ethical behavior, 101 ethical intensity, 108 ethical responsibility, 122 ethics, 100 legal responsibility, 122 magnitude of consequences, 108 overt integrity test, 112 personal aggression, 104 personality-based integrity test, 112
political deviance, 104 postconventional level of moral development, 110 preconventional level of moral development, 109 primary stakeholder, 119 principle of distributive justice, 111 principle of government requirements, 111 principle of individual rights, 111 principle of long-term self-interest, 110 principle of personal virtue, 110 principle of religious injunctions, 111 principle of utilitarian benefits, 111
proactive strategy, 124 probability of effect, 108 production deviance, 102 property deviance, 102 proximity of effect, 109 reactive strategy, 123 secondary stakeholder, 120 shareholder model, 118 social consensus, 108 social responsibility, 117 social responsiveness, 123
stakeholder model, 119 stakeholders, 119 temporal immediacy, 108 whistleblowing, 116 workplace deviance, 102
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Concept Check 1. How does the nature of management jobs create the possibility for ethical abuses? 2. Identify and describe the most common forms of workplace deviance. 3. What are the U.S. Sentencing Commission Guidelines? How do they both encourage ethical behavior and punish unethical behavior by businesses? 4. What influences ethical decision making? 5. What steps can managers take to improve ethical decision making?
6. 7. 8. 9.
Outline a basic model for ethical decision making. Contrast the two models of social responsibility. What are a company’s total social responsibilities? What choices does a company have when responding to demands for social responsibility? 10. Are socially responsible companies economically successful? In other words, does it pay to be socially responsible?
Self-Assessment AN ETHICAL BASELINE Most people think they are ethical, particularly when the right thing to do is seemingly obvious. But, as you read in the chapter, 75 percent of the respondents in a nationwide survey indicated that they had witnessed unethical behavior at work. In another study across multiple industries, 48 percent of the respondents admitted to actually committing an unethical or illegal
act in the past year! And recall that with so many ways to approach ethical decision making, ethical choices are not always cut and dried. To give you an idea of your ethical perspective, take the 25-question survey found on page 615 in the Self-Assessment Appendix. The assessment will provide some baseline information as a foundation for your ethical development.
Management Decision IMPLEMENTING SUSTAINABILITY Your heart is racing as you stand in front of the gathering of customers.107 Though not usually at a loss for words, you are having trouble answering their questions about the dangers of the materials and processes used by your company, Interface, Inc., a manufacturer of commercial-grade carpet and flooring. What’s more, when you hesitate, they doggedly persist. And none of the questions are about discounts, lower prices, or inventory! After you conclude the meeting, you jump into your car, drive back to the office, and convene a task force to respond to your customers’ questions. But as soon as you assign the team its task, its members turn around and ask you to explain the company’s environmental vision. “What vision?” you think to yourself. Desperately looking for inspiration, you happen upon a book by Paul Hawkens entitled The Ecology of Commerce: A
Declaration of Sustainability. You open it, hoping to glean some good ideas that you can repackage for your task force (and your customers). Interface generates billions of dollars in revenue each year, but in the process, it extracts over 1 billion pounds of raw materials from the earth. The company is also a profligate water user, requiring millions of gallons a year for its manufacturing process—not to mention the petroleum-based materials consumed and the greenhouse gases emitted during the process. Furthermore, your product, carpet, is not recyclable. When people install new carpet, the old carpet is dumped in a landfill. But Interface is not alone. The entire carpet industry works to the same standards. Competitors like Shaw Walker, J & J Industries, and C&A Floorcoverings use the same amount of materials, have essentially the same manufacturing processes, and generate the same
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amount of waste, all for products that can’t be (or aren’t) recycled. After reading Hawkens’s book, you realize that Interface will have to change. The question is “How much?” How much can Interface change its processes to be environmentally friendly without compromising the company’s growth? Sustainability requires that products either be able to easily reenter nature without depositing toxins or be recyclable into new materials. For a manufacturing process to be sustainable, its net effect on the environment must be zero. That might mean using renewable resources, redesigning the process to eliminate all waste streams, or even creating
a product that can be infinitely recycled. That’s a lot to ask. Can you sustain the company if you adopt environmental sustainability as a vision? Questions 1. Which level of social responsibility best describes the company’s current operations? 2. What environmental vision do you communicate to your task force? In other words, what social responsiveness strategy will you adopt at Interface? 3. Can sustainability be economically viable for Interface? Defend your answer.
Management Team Decision SPONSORSHIP OR SELLOUT In the world of charitable organizations, the most grueling activity must certainly be fund-raising.108 Although soliciting donations for popular causes can be easy, lesser known nonprofits, which do very important work, may have difficulty consistently raising enough money to function. Sometimes, corporate sponsorship is necessary to obtain adequate funding. The obvious plus to corporate sponsorship is the cash, and perhaps greater visibility and legitimacy in the community (depending, of course, on the reputation of the sponsor). But corporate sponsorship can also have drawbacks. Potential donors may think that the charity no longer needs additional funding or withdraw support because they perceive that the charity has “sold out” to corporate financial inducements. In considering a possible sponsorship, managers of charitable organizations can find themselves facing an ethical dilemma. Consider the following situations:
•
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A charity dedicated to removing drunk drivers from the highways wants to hold a recognition dinner, but it is floundering financially. A beer company offers to sponsor the event for $25,000 as part of its efforts to promote responsible drinking. A health-care foundation that is putting on a benefit concert to raise money to fund research on respiratory diseases signs up a popular regional band. Unable to cover the costs for the band, concert hall, decorations, and publicity, the foundation entertains an offer from operators of a new and controversial waste incineration plant, who are willing to put up $50,000 to become sponsors of the event.
These situations are all too common in the world of nonprofit fund-raising, and getting these decisions right can often mean the difference between success and failure. To execute this management team decision, you will need to assemble a team of four to five students. Your management team will be working with the following scenario: Community Action for the Poor (CAP) is a prominent charity that has been campaigning on behalf of low-income citizens in your area for 29 years. During the 1990s, your management team was able to lift the fund-raising for CAP to all-time highs. Fifteen years later, however, tight economic conditions have dried up donations. As CAP’s management team is meeting to determine how and when to shut down operations, you receive a call from a local chain of check-cashing stores, FastCheck. FastCheck is a payday lending business that charges extremely high interest for the service of cashing personal checks for people who are broke. Typically, FastCheck targets people with low incomes. You put the representative from FastCheck on the speaker phone so that the entire team can hear her. She proposes that FastCheck sponsor a spring festival to raise money for CAP. FastCheck will give CAP $20,000 to organize the festival (rent tents and games, arrange concessions, etc.), and CAP will receive all of the proceeds from the festival. In return, FastCheck wants to set up a booth at the festival and have its name and logo next to CAP’s on any promotional materials, such as flyers, banners, and buttons. You thank the representative and turn off the phone. Turning to your team, you say, “So, do we take the money or not?”
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You will be making a decision for or against corporate sponsorship for CAP by FastCheck. Before beginning the exercise, review Exhibit 4.6. You may even wish to print out the corresponding Worksheet 4.6 from Xtra! to use as a guide during the activity. Questions 1. Rank the ethical intensity of the decision. Consider assigning a numerical value to each of the six fac-
tors listed on page 108, on a scale of, say, 1 to 5. Add the six values together and assess the sum against a possible 30 points. 2. What is your final decision? (As a team, examine the situation through the lens of each of the principles of ethical decision making; then make a decision.) 3. What role did the ethical intensity of the decision play in your ultimate decision?
Develop Your Career Potential EXAMINING NONPROFITS
It is only the farmer who faithfully plants seeds in the Spring, who reaps a harvest in the Autumn. —B. C. Forbes, founder of Forbes magazine The purpose of these assignments is to develop your present and future capabilities as a manager. Since stakeholders increasingly expect companies to do more to fulfill their discretionary responsibilities, chances are you and your company will be expected to support your community in some significant way. To begin learning about community needs and corporate social responsibility, visit a local charity or nonprofit organization of your choosing, perhaps a hospital, the Red Cross, Goodwill, Planned Parenthood, a soup kitchen, or a homeless shelter. Talk to the people who work or volunteer there. Gather the information you need to answer the following questions.
Questions 1. What is the organization’s mission? 2. Who does the organization serve, and how does it serve them? 3. What percentage of the organization’s donations is used for administrative purposes? What percentage is used to directly benefit those served by the organization? What is the ratio of volunteers to paid workers? 4. What job or task does the “typical” volunteer perform for the organization? How much time does the typical volunteer give to the organization each week? For what types of jobs does the organization need more volunteers? 5. How does the business community support the organization? 6. Why are you interested in the activities of this organization?
Take Two
Biz Flix Emperor’s Club
William Hundert (Kevin Kline), a professor at Saint Benedict’s preparatory school, believes in teaching his students about living a principled life as well as teaching them his beloved classical literature. Hundert’s principled ways are challenged, however, by a new student, Sedgewick Bell (Emile Hirsch). Bell’s behavior during the 73rd annual Julius Caesar competition causes Hundert to suspect that Bell leads a less than principled life. Years later Hundert is the honored guest of his former student Sedgewick Bell (Joel Gretsch) at Bell’s estate. Depaak Mehta (Rahul Khanna), Bell, and Louis Masoudi (Patrick Dempsey) compete in a reenactment of the Julius Caesar competition. Bell nearly wins the competition, but when Hundert notices that Bell is wearing an earpiece and is cheating with an assistant’s help, he gives him a question he knows he cannot answer. Earlier in the film Hundert had suspected that the young Bell also cheated during the competition, but Headmaster Woodbridge (Edward Herrmann) had pressed him to ignore his suspicion. This scene appears at the end of the film. It is an edited portion of the competition reenactment. Bell announced his candidacy for the U.S. Senate just before talking to Hundert in the bathroom. He carefully described his commitment to specific values that he would pursue if elected. What to Watch for and Ask Yourself
1. Based on the clip, what ethical principles do you think most inform William Hundert’s thinking? 2. Describe Sedgewick Bell’s level of moral development.
Management Workplace Eco-Natural Solutions, Sundance, and Diversified Chemical
Ethical business and social responsibility have a different meaning for every organization. Eco-Natural Solutions, an organic candy company, Sundance, the artistic venture associated with Robert Redford, and Diversified Chemical, a conglomerate based in Detroit, all have a different perspective on what it means to be socially responsible. Nevertheless they all agree that business and social responsibility do not have to be opposing forces. In fact, they view social responsibility as an impetus and rationale for starting, building, and growing a business enterprise. What to Watch for and Ask Yourself:
1. Compare the way that Eco-Natural, Sundance, and Diversified Chemical view social responsibility. 2. For these companies, has social responsibility been profitable?
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CHAPTER 5
Planning and Decision Making 132 CHAPTER 6
Organizational Strategy 166 CHAPTER 7
Innovation and Change 202 CHAPTER 8
Global Management 236
Planning and Decision Making
O U T L I N E
What Would You Do?
C H A P T E R
Chapter 5 3. Planning from Top to Bottom
Planning 1. Benefits and Pitfalls of Planning 1.1 Benefits of Planning 1.2 Planning Pitfalls
2. How to Make a Plan That Works 2.1 Setting Goals 2.2 Developing Commitment to Goals 2.3 Developing Effective Action Plans 2.4 Tracking Progress 2.5 Maintaining Flexibility 3.1 Starting at the Top 3.2 Bending in the Middle 3.3 Finishing at the Bottom
What Is Rational Decision Making? 4. Steps and Limits to Rational Decision Making 4.1 Define the Problem 4.2 Identify Decision Criteria 4.3 Weight the Criteria
4.4 Generate Alternative Courses of Action 4.5 Evaluate Each Alternative 4.6 Compute the Optimal Decision 4.7 Limits to Rational Decision Making
5. Using Groups to Improve Decision Making 5.1 Advantages and Pitfalls of Group Decision Making 5.2 Structured Conflict 5.3 Nominal Group Technique 5.4 Delphi Technique 5.5 Stepladder Technique 5.6 Electronic Brainstorming
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise
Xtra! Six exhibit worksheets, author FAQs, quiz, Management News, and the video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
D.G. Yuengling & Son, Pottsville, Pennsylvania.1 With beer sales dropping around the world, you should be ecstatic that sales of Yuengling (pronounced Ying-Ling) beer are up 225 percent in the last six years. But as you walk through the caves and tunnels of Yuengling’s Eagle Brewery, carved into Sharp Mountain in 1831 to maintain a perfect 50-degree temperature for storing beer, you see not only the history of America’s oldest brewery everywhere you turn, but also chipped paint, rusting pipes, and an aging plant that can’t keep up with the growing demand for Yuengling beer. So far, thanks to hard work, dedicated workers, and some luck, you’ve doubled your production capacity from 250,000 to 500,000 barrels of beer a year, but if you push for more, the old brewery will break. Yet with sales up so dramatically, the company faces a problem says CEO and owner Dick Yuengling, “We are sold out of beer. We run the risk of losing our customer base because we don’t have any product on the shelves.” Shortages are so bad that the advertising budget has been cut from $3 to $2 a barrel. Yuengling explains, “You can’t fuel the fire when we can’t get them beer anyway.” Ironically, with production stuck at 500,000 barrels a year, Yuengling beer has become harder to find as it has become more popular. Sales representative Diane Adams said, “It was a little hairy. People were up in arms.” So, rather than sacrifice sales in its home market of Pennsylvania, where Yuengling has its largest market share (10 percent), the company has temporarily stopped shipping beer to distributors in Maine, Massachusetts, and Rhode Island. Since that strategy won’t help Yuengling grow outside Pennsylvania, you still face the question of how to permanently increase beer production to meet the growing demand. You’ve identified five options. The first is to add new storage and finishing tanks to Eagle Brewery to increase production capacity by 10 percent to 550,000 barrels a year. Though doable, this is only a short-term solution. Second, you could outsource production to another company. This would be more cost-effective, but would Yuengling beer produced in non-Yuengling factories taste different? For a “specialty” beer,
What Would You Do?
this could be a substantial risk. Still, outsourcing would be affordable, and Yuengling has done it before, outsourcing production of its Black and Tan beer to Pabst Blue Ribbon’s brewery in Lehigh, Pennsylvania, until Pabst closed that facility four years ago. The third option is to buy another brewery, but there aren’t many for sale and those that are would be expensive and require significant upgrades. For example, it would cost $13 million to buy and $5 million to fix Stroh’s 1.5 million-barrel brewery in Tampa, Florida, which is far from Yuengling’s northeastern markets. A fourth option is to build a new factory capable of producing 1.2 million barrels per year, but that would cost $50 million and take three years. The fifth and final option is simply to “do nothing.” The company is already very profitable, has low overhead costs, and is very efficient. In other words, by “doing nothing” the company could still make a lot of money without incurring the risks inherent in the other options. And risk is a real consideration because everyone in the company remembers that Yuengling was losing money just a few years STUDY TIP ago. Try to explain the key So, what’s the best way to concepts of this chapter to a evaluate these options? Put friend or family member who another way, what’s the best is not taking the class with way to make this decision? Furthermore, what process or you. This will help you criteria should you use to identify which areas you need decide which of these five to review—and how much. options is best? Also, how can you build some flexibility into your plans, no matter what you decided? Doing this could be difficult, considering the expense involved in some of the options, but you don’t want to be locked into only one option, especially if Yuengling’s competitive environment changes. Finally, what’s the best way to put together an effective action plan and then track your progress in implementing it? If you were in charge at Yuengling beer, what would you do?
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Even inexperienced managers know that planning and decision making are central parts of their jobs. Figure out what the problem is. Generate potential solutions or plans. Pick the best one. Make it work. Experienced managers, however, know how hard it really is to make good plans and decisions. One seasoned manager said: “I think the biggest surprises are the problems. Maybe I had never seen it before. Maybe I was protected by my management when I was in sales. Maybe I had delusions of grandeur, I don’t know. I just know how disillusioning and frustrating it is to be hit with problems and conflicts all day and not be able to solve them very cleanly.”2 This chapter begins by examining the benefits and pitfalls of planning. Next, you will learn how to make a plan that works. Then, you will look at the different kinds of plans that are used from the top to the bottom in most companies. In the second part of the chapter, we discuss the steps of rational decision making and also consider its limitations. We finish the chapter by discussing how managers can use groups and group decision techniques to improve decisions.
Planning planning
Planning is choosing a goal and developing a method or strategy to achieve that
Choosing a goal and developing a strategy to achieve that goal.
goal. Yuki Funo, who is in charge of Toyota’s American sales division, says, “Once you grab a 10 percent share in most markets, consumers almost always put your product on their shopping list. My experience . . . tells me there’s not a significant hurdle going from 10 percent to 20 percent.”3 So, with an 11.2 percent market share in the United States, Toyota’s goal is to increase it to 15 percent by 2010. Achieving that goal would move Toyota, which is now the fourth largest car maker in the United States, ahead of DaimlerChrysler, which has a 14.1 percent market share. How does Toyota plan to meet its 15 percent market share goal? Two words: geography and trucks. In terms of geography, Toyota already has an 18 percent market share in California, but only 5 to 6 percent in the Midwest, where it has a tremendous opportunity to increase sales. Indeed, in a recent year Toyota sold more cars in the Chicago area than any other automaker. According to Funo, “That’s a very symbolic sign of how customers’ attitudes are shifting toward international nameplates in the Midwest.” But, Funo adds, the only sure way for Toyota to get 15 percent market share nationally is with pickup trucks. With the addition of a new truck plant in San Antonio, Texas, Toyota should be able to double its annual truck production to 250,000 half-ton Toyota Tundra trucks. That level of production would give it exactly 10 percent of U.S. truck sales and help Toyota move toward its overall goal of a 15 percent market share.
1 2 3
1
After reading the next three sections, you should be able to discuss the benefits and pitfalls of planning. describe how to make a plan that works. discuss how companies can use plans at all management levels, from top to bottom.
BENEFITS AND PITFALLS OF PLANNING
Are you one of those naturally organized people who always makes a daily to-do list, writes everything down so you won’t forget, and never misses a deadline because you keep track of everything with your handy timemanagement notebook or your Palm PC? Or are you one of those flexible, creative, go-with-the-flow people who dislike planning and organizing because
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it restricts your freedom, energy, and performance? Some people are natural planners. They love it and can only see its benefits. Others dislike planning and can only see its disadvantages. It turns out that both views are correct. Planning has advantages and disadvantages. Let’s learn about 1.1 the benefits and 1.2 the pitfalls of planning.
1.1 Benefits of Planning Planning offers several important benefits: intensified effort, persistence, direction, and creation of task strategies.4 First, as shown in Exhibit 5.1, managers and employees put forth greater effort when following a plan. Take two workers. Instruct one to “do his or her best” to increase production, and instruct the other to achieve a 2 percent increase in production each month. Research shows that the one with the specific plan will work harder.5 Second, planning leads to persistence, that is, working hard for long periods. In fact, planning encourages persistence even when there may be little chance of short-term success.6 McDonald’s founder Ray Kroc, keen believer in the power of persistence, had this quotation from President Calvin Coolidge hung in all of his executives’ offices: “Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.”7 The third benefit of planning is direction. Plans encourage managers and employees to direct their persistent efforts toward activities that help accomplish their goals and away from activities that don’t.8 For example, a large insurance company wanted to improve the performance evaluation feedback its managers gave employees. To help the managers improve, company trainers taught them 43 effective performance feedback behaviors, such as, “I will give my subordinate a clear understanding of the results I expect him or her to achieve” and “During the performance appraisal interview, I will be very supportive, stressing good points before discussing needed improvement.” During the training, managers were instructed to choose just 12 behaviors (out of the 43) on which they wanted to make the most improvement. When subordinates rated their managers on the 43 behaviors, it became clear that no matter which 12 behaviors different managers chose to concentrate on, they improved only on those 12 behaviors. Thus, plans direct behavior toward activities that lead to goal accomplishment and away from those that don’t. The fourth benefit of planning is that it encourages the development of task strategies. In other words, planning not only encourages people to work hard for extended periods and to engage in behaviors directly related to goal accomplishment, but it also encourages them to think of better ways to do their jobs. Finally, perhaps the most compelling benefit of planning is that it has been proved to work for both companies and individuals. On average, companies with plans have larger profits and grow much faster than companies that don’t.9 The same holds true for individual managers and employees. There is no better way to improve the performance of the people who work in a company than to have them set goals and develop strategies for achieving those goals.
Exhibit 5.1 Benefits of Planning
Benefits of Planning
Persistence
Direction
1.2 Planning Pitfalls Despite the significant benefits associated with planning, planning is not a cure-all. Plans won’t fix all organizational problems. In fact, many management authors and consultants believe that planning can harm companies in several ways.10
Intensified Effort
Creation of Task Strategies
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As shown in Exhibit 5.2, the first pitfall of planning is that it can impede change and prevent or slow needed adaptation. Sometimes companies become so committed to achieving the goals set forth in their plans, or on following the strategies and tactics spelled out in them, that they fail to see that their plans aren’t working or that their goals need to change. Ironically, Sony, which is famous for its Triniton (picture-tube) televisions, was one of the last major TV manufacturers to develop a line of flat-screen TVs. Sony’s TV diviFalse Sense sion was so committed to the old—and now outdated—Triniton of Certainty picture-tube technology that its engineers were reluctant to turn to Sony’s audio, videogame, and computer monitor divisions for help and expertise in designing new flat-screen TVs. Makoto Kogure, Impedes Change Detachment who headed Sony’s TV division, admitted “We did everything inside and Adaptation of Planners the TV group.”11 The second pitfall is that planning can create a false sense of certainty. Planners sometimes feel that they know exactly what the Exhibit 5.2 future holds for their competitors, their suppliers, and their companies. HowPitfalls of Planning ever, all plans are based on assumptions. “The price of gasoline will increase by 4 percent per year.” “Exports will continue to rise.” For plans to work, the assumptions on which they are based must hold true. If the assumptions turn out to be false, then the plans based on them are likely to fail. The third potential pitfall of planning is the detachment of planners. In theory, strategic planners and top-level managers are supposed to focus on the big picture and not concern themselves with the details of implementation, that is, carrying out the plan. According to management professor Henry Mintzberg, detachment leads planners to plan for things they don’t understand.12 Plans are meant to be guidelines for action, not abstract theories. Consequently, planners need to be familiar with the daily details of their businesses if they are to produce plans that can work. If you doubt that the “details” are important to good execution of a plan, imagine that you’re about to have coronary bypass surgery to replace four clogged arteries. You can have either an experienced surgeon or a first-year medical intern perform your surgery. The intern is a fully qualified M.D. who clearly understands the theory and the plan behind bypass surgery, but has never performed such an operation. As you lie on the operating table, who is the last person you’d like to see as the anesthesia kicks in, the first-year intern who knows the plan but has never done a bypass or the experienced surgeon who has followed the plan hundreds of times? Planning works better when the people developing the plan are not detached from the process of executing the plan. Pitfalls of Planning
Review 1: Benefits and Pitfalls of Planning Planning is choosing a goal and developing a method to achieve that goal. Planning is one of the best ways to improve organizational and individual performance. It encourages people to work harder (intensified effort), to work hard for extended periods (persistence), to engage in behaviors directly related to goal accomplishment (directed behavior), and to think of better ways to do their jobs (task strategies). But most important, companies that plan have larger profits and faster growth than companies that don’t plan. However, planning also has three potential pitfalls. Companies that are overly committed to their plans may be slow to adapt to changes in their environment. Planning is based on assumptions about the future, and when those assumptions are wrong, plans are likely to fail. Finally, planning can fail when planners are detached from the implementation of plans.
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HOW TO MAKE A PLAN THAT WORKS
Planning is a double-edged sword. If done right, planning brings about tremendous increases in individual and organizational performance. If planning is done wrong, however, it can have just the opposite effect and harm individual and organizational performance. In this section, you will learn how to make a plan that works. As depicted in Exhibit 5.3, planning consists of 2.1 setting goals, 2.2 developing commitment to the goals, 2.3 developing effective action plans, 2.4 tracking progress toward goal achievement, and 2.5 maintaining flexibility in planning.
2.1 Setting Goals Since planning involves choosing a goal and developing a method or strategy to achieve that goal, the first step in planning is to set goals. To direct behavior and increase effort, goals need to be specific and challenging.13 For example, deciding to “increase sales this year” won’t direct and energize workers as much as deciding to “increase North American sales by 4 percent in the next six months.” Likewise, deciding to “drop a few pounds” won’t motivate you as much as deciding to “lose 15 pounds.” Specific, challenging goals provide a target for which to aim and a standard against which to measure success. One way of writing effective goals for yourself, your job, or your company is to use the S.M.A.R.T. guidelines. S.M.A.R.T. goals are Specific, Measurable, Attainable, Realistic, and Timely.14 Let’s see how a heating, ventilation, and air-conditioning (HVAC) company might use S.M.A.R.T. goals in its business. The HVAC business is cyclical. It’s extremely busy at the beginning of summer, when homeowners find that their air-conditioning isn’t working, and at the beginning of winter, when furnaces and heat pumps need repair. During these times, most HVAC companies have more business than they can handle. But at other times of year, business can be very slow. So a specific goal would be to increase sales by 50 percent during the fall and spring, when business is slower. This goal could be measured by keeping track of the number of annual maintenance contracts sold to customers. This goal of increasing sales during the off-seasons is attainable because maintenance contracts typically include spring tune-ups (air-conditioning systems) and fall tune-ups (furnace or heating systems). Moreover, a 50 percent increase in sales during the slow seasons is realistic. Because customers want their furnaces and air conditioners to work
1
2
3
4
5
Set goals
Develop commitment
Develop effective action plans
Track progress toward goal achievement
Maintain flexibility
Who What When How
Revise existing plan or Begin planning process anew
JAN
S.M.A.R.T. goals Goals that are specific, measurable, attainable, realistic, and timely.
Exhibit 5.3 How to Make a Plan That Works
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THE R IGHT TH G IN IN O G D
STRETCH GOALS: AVOID THE “15 PERCENT DELUSION” Stretch goals are extremely ambitious goals that you don’t know how to reach.17 The purpose of stretch goals is to achieve extraordinary improvements in company performance. Stretch goals are so demanding that they force managers and workers to throw away old comfortable solutions and adopt radical, never-used solutions. Though stretch goals may encourage large improvements, they may also pressure people to do anything to meet “the numbers.” The most common stretch goal CEOs set is “15 percent annual growth,” the magical number that doubles corporate earnings every five years. But with earnings growth averaging just 8 percent over the last 40 years, the chances of achieving 15 percent growth every year are extremely low. So instead of promising generally unobtainable results, managers should set more realistic stretch goals. When Bob Eckert became CEO of Mattel, he dumped the company’s stated goals of 15 percent annual earnings growth and 10 percent revenue growth. Said Eckert, “They were not realistic. We were not going to play that game anymore.”18
goal commitment The determination to achieve a goal.
the first time it gets cold (or hot) each year, they are likely to buy service contracts that ensure their equipment is in working order. Tune-up work can then be scheduled during the slow seasons, increasing sales at those times. Finally, this goal can be made timely by asking the staff to push sales of maintenance contracts before Labor Day, the traditional end of summer, when people start thinking about the cold days ahead, and in March, when winter-weary people start longing for hot days in air-conditioned comfort. The result would be more work during the slow fall and spring seasons.
2.2 Developing Commitment to Goals
Just because a company sets a goal doesn’t mean that people will try to accomplish it. If workers don’t care about a goal, then the goal won’t encourage them to work harder or smarter. Thus, the second step in planning is to develop commitment to goals.15 Goal commitment is the determination to achieve a goal. Commitment to achieve a goal is not automatic. Managers and workers must choose to commit themselves to a goal. For example, Professor Edwin Locke, the foremost expert on how, why, and when goals work, told a story about an overweight friend who finally lost 75 pounds. Locke said, “I asked him how he did it, knowing how hard it was for most people to lose so much weight.” His friend responded, “Actually, it was quite simple. I simply decided that I really wanted to do it.”16 Put another way, goal commitment is really wanting to achieve a goal. So how can managers bring about goal commitment? The most popular approach is to set goals participatively. Rather than assigning goals to workers (“Johnson, you’ve got till Tuesday of next week to redesign the flex capacitor so it gives us 10 percent more output”), managers and employees choose goals together. The goals are more likely to be realistic and attainable if employees participate in setting them. Another technique for gaining commitment to a goal is to make the goal public. For example, college students who publicly communicated their semester grade goals (“This semester, I’m shooting for a 3.5”) to significant others (usually a parent or sibling) were much more committed to achieving their grades. More important, those students earned grades that were nearly a halfgrade higher than the grades of students who did not tell others about their grade goals.19 So, one way to increase commitment to goals is to “go public” by having individuals or work units tell others about their goals. Another way to increase goal commitment is to obtain top management’s support. Top management can show support for a plan or program by providing funds, speaking publicly about the plan, or participating in the plan itself.
2.3 Developing Effective Action Plans action plan The specific steps, people, and resources needed to accomplish a goal.
The third step in planning is to develop effective action plans. An action plan lists the specific steps (how), people (who), resources (what), and time period (when) for accomplishing a goal. For example, for some time, Severn Sound, a popular water recreational area in Ontario, Canada, had to restrict swimming and fishing because of pollution and reduced oxygen levels in the water. Now, however, thanks to steps implemented over the last decade, the ecosystem has been restored and walleye fish, once nearly eliminated, are abundant again. Cities and towns reduced and treated storm-water runoff; farmers and local residents
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reduced agricultural and yard fertilizer runoff; farmers reduced animal waste runoff by erecting fences to keep livestock away from streams that fed the sound; local residents reduced human waste runoff by connecting their homes to municipal sewer systems and better maintaining their septic systems; 129,000 trees and shrubs were planted to reduce erosion; and finally, the Department of Fisheries and Oceans mapped fish habitats to determine which areas of the sound could be developed for housing without adversely affecting the sound or its fish population.20
2.4 Tracking Progress The fourth step in planning is to track progress toward goal achievement. There are two accepted methods of tracking progress. The first is to set proximal goals and distal goals. Proximal goals are short-term goals or subgoals, whereas distal goals are long-term or primary goals.21 The idea behind setting proximal goals is that achieving them may be more motivating and rewarding than waiting to reach far-off distal goals. In a research study, Massachusetts Institute of Technology students were given a complex proofreading assignment; they were paid 10 cents for each error they found, but were penalized $1 a day for turning in their work late. One group of students was given a single deadline, that is, a distal goal, and told to turn in all of their work three weeks from the start of the study. A second group of students was given weekly deadlines, that is, proximal goals, and told to turn in one-third of their work each week. A third group of students was allowed to set their own deadlines; that is, they set their own proximal goals. The single-deadline students (i.e., no proximal goals,
Baseline
Wrapping Department
Intervention
Reversal
(safety training, specific goals, and daily feedback)
(no daily feedback)
proximal goals Short-term goals or subgoals.
distal goals Long-term or primary goals.
Exhibit 5.4 Effects of Goal Setting, Training, and Feedback on Safe Behavior in a Bread Factory
Percentage of Incidents Performed Safely
100 90 80
Safety average 3 increases to 95.8%
70 60 50
70.8%
5
1
Safety average 70%
0 Intervention
Baseline
Reversal
Makeup Department 100
Without feedback, safety average falls back
90 Safety 4 average increases to 99.3%
80 70
72.3% 6
60 50
Safety 2 average 78%
0 5
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25
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Observation Sessions
Source: (c) 1978 by the American Psychological Association. “A Behavioral Approach to Occupational Safety: Pinpointing and Reinforcing Safe Performance in a Food Manufacturing Plant.” Komaki, J., Barwick, K. D., & Scott, L. R., Journal of Applied Psychology, 1978, V63. Reprinted with permission.
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just a distal goal) were the worst performers: they turned in their work 12 days late and corrected only 70 errors. The students who were assigned weekly goals (i.e., proximal goals) were the best performers: they turned in their work only a half day late and corrected 136 errors. Next best were the students who set their own proximal goals: they turned in their work 6.5 days late and corrected 104 errors.22 The lesson for managers is clear. If you want people to do a better job of tracking the quality and timeliness of their work, use proximal goals to set multiple deadlines.23 The second method of tracking progress is to gather and provide performance feedback. Regular, frequent performance feedback allows workers and managers to track their progress toward goal achievement and make adjustments in effort, direction, and strategies.24 For example, Exhibit 5.4 shows the result of providing feedback on safety behavior to the makeup and wrapping workers in a large bakery company. The company had a worker safety record that was two-and-a-half times worse than the industry average. During the baseline period, workers in the wrapping department, who measure and mix ingredients, roll the bread dough, and put it into baking pans, performed their jobs safely about 70 percent of the time (see arrow 1 in Exhibit 5.4). The baseline safety record for workers in the makeup department, who bag and seal baked bread and assemble, pack, and tape cardboard cartons for shipping, was a bit better at 78 percent (see arrow 2). After the company gave workers 30 minutes of safety training, set a goal of 90 percent safe behavior, and then provided daily feedback (such as a chart similar to Exhibit 5.4), performance improved dramatically. During the intervention period, the percentage of safely performed behaviors rose to an average of 95.8 percent for wrapping workers (see arrow 3) and 99.3 percent for workers in the makeup department (see arrow 4), and never fell below 83 percent. Thus, the combination of training, a challenging goal, and feedback led to a dramatic increase in performance. The importance of feedback alone can be seen in the reversal stage, when the company quit posting daily feedback on safe behavior. Without daily feedback, the percentage of safely performed behavior returned to baseline levels, 70.8 percent for the wrapping department (see arrow 5)and 72.3 percent for the makeup department (see arrow 6). For planning to be effective, workers need both a specific, challenging goal and regular feedback to track their progress. Indeed, additional research indicates that the effectiveness of goal setting can be doubled by the addition of feedback.25
2.5 Maintaining Flexibility
options-based planning Maintaining planning flexibility by making small, simultaneous investments in many alternative plans.
slack resources A cushion of extra resources that can be used with options-based planning to adapt to unanticipated changes, problems, or opportunities.
Because action plans are sometimes poorly conceived and goals sometimes turn out not to be achievable, the last step in developing an effective plan is to maintain flexibility. One method of maintaining flexibility while planning is to adopt an options-based approach.26 The goal of options-based planning is to keep options open by making small, simultaneous investments in many options or plans. Then, when one or a few of these plans emerge as likely winners, you invest even more in these plans while discontinuing or reducing investment in the others. In part, options-based planning is the opposite of traditional planning. For example, the purpose of an action plan is to commit people and resources to a particular course of action. In contrast, the purpose of options-based planning is to leave those commitments open by maintaining slack resources, that is, a cushion of resources, such as extra time, people, money, or production capacity, that can be used to address and adapt to unanticipated changes, problems, or opportunities.27 Holding options open gives you choices, and choices, combined with slack resources, give you flexibility. Options-based planning is especially useful when uncertainty is high and you don’t know how things will change or what will work in the future.
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NBA/GETTY IMAGES
For example, in the National Basketball Association, new stadiums quickly become obsolete. As player salaries rise, teams are demanding new arenas with two key features: luxury seating (luxury boxes rent for $125,000 per season and higher) and more seats. The Miami Heat left a 12year-old arena to play in the brand new $280 million American Airlines arena. The Charlotte Hornets moved to New Orleans when the city of Charlotte, North Carolina, wouldn’t replace their 14-year-old arena. To avoid such instant obsolescence, the San Antonio Spurs worked with their architects to build flexibility into their new arena, the $190 million SBC Center. For instance, with no physical barriers around the most expensive “club” seats, prime seating can easily be increased. Likewise, the arena’s 40 terrace-level luxury boxes can easily convert to larger party suites and back again, depending on whether high-paying customers want more or less room. Finally, a high-tech curtain system allows the arena to be reconfigured to accommodate a sold-out Spurs game with 18,000 in attendance or a concert with an audience of 5,000. Says lead architect Bill Crockett, “We’ve built in a lot of flexibility that should keep the building viable for another 30 years without major changes.”28 Another method of maintaining flexibility while planning is to take a learningbased approach. In contrast to traditional planning, which assumes that initial action plans are correct and will lead to success, learning-based planning assumes that action plans need to be continually tested, changed, and improved as companies learn better ways of achieving goals.29 For example, Knight-Ridder Corporation, which owns the second-largest newspaper chain in the United States, continues to test a number of different plans as it tries to reverse the 9 percent decline in its newspaper circulation over the last decade.30 To increase readership among young adults, only 41 percent of whom read newspapers, Knight-Ridder newspapers have added sections with music and movie reviews and a wide listing of entertainment events. They’ve also switched to shorter articles, more color, and better layouts and indexes to make it easier for younger readers to find what they’re looking for. So far, young adult readership hasn’t budged, so four Knight-Ridder newspapers are experimenting with price cuts, slashing the cost of their papers to 25 cents on weekdays and $1 on Sundays. Since the price cuts, some papers have seen daily and Sunday circulation increase. The company will continue to test and revise its plans until it learns how to increase readership.31
Review 2: How to Make a Plan That Works There are five steps to making a plan that works: (1) Set S.M.A.R.T. goals—goals that are Specific, Measurable, Attainable, Realistic, and Timely. (2) Develop commitment to the goals from the people who contribute to goal achievement. Managers can increase workers’ goal commitment by encouraging worker participation in goal setting, making goals public, and getting top management to show
Designers of the SBC Center in San Antonio built flexibility into their plans. As such, the arena can accommodate crowds of 18,000 for Spurs games, like this one, or smaller audiences for events like concerts.
learning-based planning Learning better ways of achieving goals by continually testing, changing, and improving plans and strategies.
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support for workers’ goals. (3) Develop action plans for goal accomplishment. (4) Track progress toward goal achievement by setting both proximal and distal goals and by providing workers with regular performance feedback. (5) Maintain flexibility. Keeping options open through options-based planning and seeking continuous improvement through learning-based planning help organizations maintain flexibility as they plan.
PLANNING FROM TOP TO BOTTOM
3
Planning works best when the goals and action plans at the bottom and middle of the organization support the goals and action plans at the top of the organization. In other words, planning works best when everybody pulls in the same direction. Exhibit 5.5 illustrates this planning continuity, beginning at the top with a clear definition of the company vision and ending at the bottom with the execution of operational plans. Let’s see how 3.1 top managers create the organizational vision and mission, 3.2 middle managers develop tactical plans and use management by objectives to motivate employee efforts toward the overall vision and mission, and 3.3 first-level managers use operational, single-use, and standing plans to implement the tactical plans.
3.1 Starting at the Top strategic plans Overall company plans that clarify how the company will serve customers and position itself against competitors over the next two to five years.
vision An inspirational statement of an organization’s enduring purpose.
Exhibit 5.5
As shown in Exhibit 5.6, top management is responsible for developing longterm strategic plans that make clear how the company will serve customers and position itself against competitors in the next two to five years. (The strategic planning and management process is reviewed in its entirety in Chapter 6.) Strategic planning begins with the creation of an organizational vision and an organizational mission. A vision is a statement of a company’s purpose or reason for existing.32 Vision statements should be brief—no more than two sentences. They should also be enduring, inspirational, clear, and consistent with widely shared company beliefs and values. For example, consider the vision statement of Merck & Co., a leading pharmaceutical firm, shown in Exhibit 5.7. It is the same whether Merck uses natural or synthetic chemical compounds or whether its researchers use high-tech gene-splicing equipment or low-tech petri dishes. The vision of “innovations and
Planning from Top to Bottom
al Plans c t ic Ta
Mission
Vision
e-U se
Ma na
s an y Objectiv Pl nt b es me ge
ational Pla Oper ns
Sing l
Vision
Top
Managers
Middle Managers
First-Level Managers
Stand
in
l gP
an
s
Mission
Tactical P lan s
t emen M a nag by ives O b j e ct
O pe
ratio P la n n a l s
Standing Plans
leS in g Use s Plan
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Plans
solutions that improve the quality of life,” Planning Time Lines “meaningful work,” and “superior rate of return” stays the same. Furthermore, the vision is clear, inspirational, and consistent with 2 Years 5 Years Strategic Merck’s company values, also shown in Exhibit 5.7. Other examples of organizational vi6 Months sions are Walt Disney Company’s “to make 2 Years Tactical people happy” and Schlage Lock Company’s “to make the world more secure.”33 30 Days The mission, which flows from the vision, is a more specific goal that unifies companyOperational 6 Months wide efforts, stretches and challenges the organization, and possesses a finish line and a 0 1 2 3 4 5 6 time frame. For example, in 1961, President Years John F. Kennedy established an organizational mission for NASA with this simple statement: “Achieving the goal, before this decade is out, Exhibit 5.6 of landing a man on the moon and returning him safely to earth.”34 NASA Time Lines for Strategic, Tactical, and achieved this goal on 20 July 1969, when astronaut Neil Armstrong walked on Operational Plans the moon. Once a mission has been accomplished, a new one should be chosen. Again, however, the new mission must grow out of the organization’s vision, mission which does not change significantly over time. For example, NASA’s new mis- A statement of a company’s overall sion is to return to the moon “as early as 2015 and no later than 2020” and to goal that unifies company-wide efforts toward its vision, stretches and use the moon “as a stepping stone for more ambitious missions” to Mars and challenges the organization, and 35 beyond.” possesses a finish line and a time
3.2 Bending in the Middle Middle management is responsible for developing and carrying out tactical plans to accomplish the organization’s mission. Tactical plans specify how a company will use resources, budgets, and people to accomplish specific goals within its mission. Whereas strategic plans and objectives are used to focus company efforts over the next two to five years, tactical plans and objectives are used to direct behavior, efforts, and attention over the next six months to two years. For example, Craig Knouf, CEO of Associated Business Systems, a 110-person business that sells office equipment in Portland, Oregon, reviews his company’s 30-page business plan monthly, semiannually, and annually to compare the company’s actual performance with the goals set forth in the plan. When Knouf noticed that over a six-month period the company had sold more high-volume scanners than before, he changed his business plan to put more emphasis on scanners and scanning software. As a result, sales of scanning products, which will double this year compared to last, now account for one-third of all sales. Working without his business plan, says Knouf, “would be like driving a car with no steering wheel.”36 Management by objectives is a management technique often used to develop and carry out tactical plans. Management by objectives, or MBO, is a four-step process in which managers and their employees (1) discuss possible goals; (2) participatively select goals that are challenging, attainable, and consistent with the company’s overall goals; (3) jointly develop tactical plans that lead to the accomplishment of tactical goals and objectives; and (4) meet regularly to review progress toward accomplishment of those goals. Lee Iacocca, the CEO who brought the former Chrysler Corporation back from the verge of bankruptcy, credits MBO (though he called it a “quarterly review system”) for his 30 years of extraordinary success as a manager. Iacocca said, “Over the years, I’ve regularly asked my key people—and I’ve had them ask their key people, and so on down the line—a few basic questions: ‘What are your objectives for the next ninety days? What are your plans, your priorities, your hopes? And how do you intend to go about achieving them?’”37
frame.
tactical plans Plans created and implemented by middle managers that specify how the company will use resources, budgets, and people over the next six months to two years to accomplish specific goals within its mission.
management by objectives (MBO) A four-step process in which managers and employees discuss and select goals, develop tactical plans, and meet regularly to review progress toward goal accomplishment.
W H A T
R E A L L Y
W O R K S
Management by Objectives For years, both managers and management researchers have wondered how much effect planning has on organizational performance or whether it really makes any difference at all. While proponents argued that planning encourages workers to work hard, persist in their efforts, engage in behaviors directly related to goal accomplishment, and develop better strategies for achieving goals, opponents argued that planning impedes organizational change and adaptation, creates the illusion of managerial control, and artificially separates thinkers and doers. Now, however, the results from 70 different organizations strongly support the effectiveness of management by objectives (i.e., short-term planning).
achievement, and regularly meet to review progress toward accomplishing those goals. Thus, MBO is based on goals, participation, and feedback. On average, companies that effectively use MBO will outproduce those that don’t use MBO by an incredible 44.6 percent! And in companies where top management is committed to MBO, that is, where objective setting begins at the top, the average increase in performance is an even more astounding 56.5 percent. By contrast, when top management does not participate in or support MBO, the average increase in productivity drops to 6.1 percent. In all, there is a 97 percent chance that companies that use MBO will outperform those that don’t! Thus, MBO can make a very big difference to the companies that use it.38
MANAGEMENT BY OBJECTIVES (MBO)
Management by objectives is a process in which managers and subordinates at all levels in a company sit down together to jointly set goals, share information and discuss strategies that could lead to goal
MBO 10%
20%
30%
40%
50%
60%
70%
probability of success
80%
90%
100%
97%
When done right, MBO is an extremely effective method of tactical planning. Still, MBO is not without disadvantages.39 Some MBO programs involve excessive paperwork, requiring managers to file annual statements of plans and objectives, plus quarterly or semiannual written reviews assessing goal progress. Today, however, electronic and Web-based management systems and software, which automate the MBO process, are making it easier for managers and employees to set goals, link them to the organization’s strategic direction, and continuously track and evaluate their progress.40 Another difficulty is that managers are frequently reluctant to give employees feedback about their performance. A third disadvantage is that managers and employees sometimes have difficulty agreeing on goals. And when employees are forced to accept goals that they don’t want, goal commitment and employee effort suffer. Last, because MBO focuses on quantitative, easily measured goals, employees may neglect important but unmeasured parts of their jobs. In other words, if your job performance is judged only by whether you reduce costs by 3 percent or raise revenues by 5 percent, then you are unlikely to give high priority to the unmeasured, but still important parts of your job, such as mentoring new employees or sharing knowledge and skills with coworkers.
3.3 Finishing at the Bottom operational plans Day-to-day plans, developed and implemented by lower-level managers, for producing or delivering the organization’s products and services over a 30-day to six-month period.
Lower-level managers are responsible for developing and carrying out operational plans, which are the day-to-day plans for producing or delivering the organization’s products and services. Operational plans direct the behavior, efforts, and priorities of operative employees for periods ranging from 30 days to six months. There are three kinds of operational plans: single-use plans, standing plans, and budgets.
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MERCK’S VISION . . . to provide society with superior products and services by developing innovations and solutions that improve the quality of life and satisfy customer needs, and to provide employees with meaningful work and advancement opportunities, and investors with a superior rate of return. MERCK’S VALUES 1. Our business is preserving and improving human life. All of our actions must be measured by our success in achieving this goal. We value, above all, our ability to serve everyone who can benefit from the appropriate use of our products and services, thereby providing lasting consumer satisfaction. 2. We are committed to the highest standards of ethics and integrity. We are responsible to our customers, to Merck employees and their families, to the environments we inhabit, and to the societies we serve worldwide. In discharging our responsibilities, we do not take professional or ethical shortcuts. Our interactions with all segments of society must reflect the high standards we profess. 3. We are dedicated to the highest level of scientific excellence and commit our research to improving human and animal health and the quality of life. We strive to identify the most critical needs of consumers and customers, and we devote our resources to meeting those needs. 4. We expect profits, but only from work that satisfies customer needs and benefits humanity. Our ability to meet our responsibilities depends on maintaining a financial position that invites investment in leading-edge research and that makes possible effective delivery of research results. 5. We recognize that the ability to excel—to most competitively meet society’s and customers’ needs—depends on the integrity, knowledge, imagination, skill, diversity and teamwork of our employees, and we value these qualities most highly. To this end, we strive to create an environment of mutual respect, encouragement and teamwork—an environment that rewards commitment and performance and is responsive to the needs of our employees and their families. Source: “The Merck Corporate Philosophy,” [Online] available at http://www.merck.com/about/mission.html, 17 February 2005. Copyright © 1995–2003 Merck & Co., Inc., Whitehouse Station, NJ, USA. All rights reserved. Used with permission.
Exhibit 5.7 Merck & Co.’s Vision and Values
Single-use plans deal with unique, one-time-only events. For example, Philip Morris is relocating its headquarters and 682 employees from Park Avenue in New York City to Henrico County, Virginia. Although the move will cost $120 million, the company will save $60 million a year in operating costs. While stressing that this was a “difficult decision to make because of our company’s long corporate history in New York City and the impact it will have on our employees,” Philip Morris’s chairman and CEO said, “This move will help to streamline our business operations, increase efficiencies and deliver significant cost savings over the long run.”41 Unlike single-use plans that are created, carried out, and then never used again, standing plans save managers time because once the plans are created, they can be used repeatedly to handle frequently recurring events. If you encounter a problem that you’ve seen before, someone in your company has probably written a standing plan that explains how to address it. There are three kinds of standing plans: policies, procedures, and rules and regulations. Policies indicate the general course of action that company managers should take in response to a particular event or situation. A well-written policy will also specify why the policy exists and what outcome the policy is intended to produce. Because the average employee surfs the Internet 11.1 hours per week, many companies have policies of either monitoring or blocking access to nonwork-related Web sites. After its monitoring policy failed, Chaparral Energy, an oil and gas company, switched to software that blocks access to religious, political, or sexually oriented Web sites. Systems engineer Richard Underwood explains, “Out in the field offices [where oil and gas exploration occurs], there was an established rule that they weren’t going by the [monitoring] rule. We wanted to make sure policies were followed.”42 Employee Web surfing has now dropped from an hour to less than 15 minutes a day.
single-use plans Plans that cover unique, one-time-only events.
standing plans Plans used repeatedly to handle frequently recurring events.
policy A standing plan that indicates the general course of action that should be taken in response to a particular event or situation.
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procedure A standing plan that indicates the specific steps that should be taken in response to a particular event.
rules and regulations Standing plans that describe how a particular action should be performed, or what must happen or not happen in response to a particular event.
budgeting Quantitative planning through which managers decide how to allocate available money to best accomplish company goals.
Procedures are more specific than policies because they indicate the series of steps that should be taken in response to a particular event. A manufacturer’s procedure for handling defective products might include the following steps: Step (1) Rejected material is locked in a secure area with “reject” documentation attached. Step (2) Material Review Board (MRB) identifies the defect and how far outside the standard the rejected products are. Step (3) MRB determines the disposition of the defective product as either scrap or as rework. Step (4) Scrap is either discarded or recycled, and rework is sent back through the production line to be fixed. Step (5) If delays in delivery will result, MRB member notifies customer.43 Rules and regulations are even more specific than procedures because they specify what must happen or not happen. They describe precisely how a particular action should be performed. For instance, many companies have rules and regulations forbidding managers from writing job reference letters for employees who have worked at their firms because a negative reference may prompt a former employee to sue for defamation of character.44 Budgets are the third kind of operational plan. Budgeting is quantitative planning because it forces managers to decide how to allocate available money to best accomplish company goals. According to Jan King, author of Business Plans to Game Plans, “Money sends a clear message about your priorities. Budgets act as a language for communicating your goals to others.” For example, Exhibit 5.8 shows the operating budget outlays for the U.S. federal government. Together, social programs (Social Security and income security, or welfare) and health-care programs (Medicare and health) account for nearly 60 percent of the federal budget. Budgeting is a critical management task—one that most managers could do better. For more detailed information about budgeting, see Essential Managers: Managing Budgets by Stephen Brookson or Budgeting Basics & Beyond: A Complete Step-by-Step Guide for Nonfinancial Managers by Jae K. Shim and Joel G. Siegel. Both books are written for budget beginners.
Review 3: Planning from Top to Bottom 2006 U.S. Federal Government Proper planning requires that the goals at the bottom and middle of the organiBudget Outlays zation support the objectives at the top of the organization. Top management develops strategic plans that indicate how a company will serve cusOther Department of Defense tomers and position itself against 13.8% 16.7% competitors over a two- to five-year period. Strategic planning starts with the creation of an organizaNet Interest International Affairs tional vision and mission. Middle 8.3% 1.5% managers use techniques like management by objectives to develop Health tactical plans that direct behavior, 10.5% efforts, and priorities over the next six months to two years. Finally, lower-level managers develop operSocial Security ational plans that guide daily activi21.4% ties in producing or delivering an Medicare organization’s products and ser13.6% vices. Operational plans typically span periods ranging from 30 days Income Security to six months. There are three kinds (i.e., unemployment benefits) of operational plans: single-use 14.1% plans, standing plans (policies, proSource: “B-80. Federal Receipts and Outlays, by Major Category, and Surplus or Deficit, Fiscal Years 1940–2006,” Ecocedures, and rules and regulations), nomic Report of the President: 2005 Report Spreadsheet Tables, [Online] Available at http://a257.g.akamaitech. net/7/257/2422/17feb20051700/www.gpoaccess.gov/eop/2005/B80.xls, 17 February 2005. and budgets. Exhibit 5.8
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What Is Rational Decision Making? Imagine that you’ve been away on business. On your first day back at the office, you sort through your phone messages and find this voice mail from the boss: You’re a computer nut, aren’t you? Whaddya call yourself, an Internet geek? Well, you know more about this stuff than anyone else in the office. Here’s what I need from you. You’ve got three weeks to get it done. I want you to prepare a presentation and write a report that details the problems we’ve been having with our computers. It should also summarize our current and future computer needs. Talk to everyone. Find out what they need and want. Be sure to consider upgrade options. I don’t want to spend a ton of money to improve our systems, only to have them be obsolete in two years. Finally, come up with at least five plans or options for getting us where we need to be. Hey, almost forgot, you’re probably going to have to do some educating here. Most of us in management don’t speak “computer geek.” Heck, half of the dinosaurs we’ve got in upper management think computers are $1,500 paperweights— don’t repeat that, okay? So be sure to explain in everyday language how we can decide which plans or options are best. Have a rough draft on my desk in three weeks. When your boss delegated this “computer problem,” what he really wanted from you is a rational decision. Decision making is the process of choosing a solution from available alternatives.45 Rational decision making, is a systematic process in which managers define problems, evaluate alternatives, and choose optimal solutions that provide maximum benefits to their organizations. Thus, your boss expects you to define and analyze the computer problem and explore alternatives. Furthermore, your solution has to be “optimal,” because the department is going to live with the computer equipment you recommend for the next three years. 4 5
4
decision making The process of choosing a solution from available alternatives.
rational decision making A systematic process of defining problems, evaluating alternatives, and choosing optimal solutions.
After reading the next two sections, you should be able to explain the steps and limits to rational decision making. explain how group decisions and group decision-making techniques can improve decision making.
STEPS AND LIMITS TO RATIONAL DECISION MAKING
Exhibit 5.9 shows the six steps of the rational decision-making process. Let’s learn more about each of these steps: 4.1 define the problem, 4.2 identify decision criteria, 4.3 weight the criteria, 4.4 generate alternative courses of action, 4.5 evaluate each alternative, and 4.6 compute the optimal decision. Then we’ll consider 4.7 limits to rational decision making.
4.1 Define the Problem The first step in decision making is identifying and defining the problem. A problem exists when there is a gap between a desired state (what is wanted) and an existing state (the situation you are actually facing). Because it can hold 550 to 850 passengers, Airbus’s new A380 super-jumbo jetliner could generate tremendous revenues for airlines. But with wings larger than a small passenger jet and wheels so large that it takes a crane to move them, the A380 was several tons too heavy. Randy Baseler of Boeing, Airbus’s competitor, said, “If the plane’s heavier, it consumes more fuel. That drives up landing and navigation fees, and also maintenance costs, especially for wheels, tires and brakes.”46 Fearing exorbitant costs, the airlines told Airbus they wouldn’t buy the A380 unless it was substantially lighter.47
problem A gap between a desired state and an existing state.
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decision criteria The standards used to guide judgments and decisions.
Exhibit 5.9 Steps of the Rational DecisionMaking Process
The existence of a gap between an existing state and a desired state is no guarantee that managers will make decisions to solve problems. Three things must occur for this to happen.48 First, managers have to be aware of the gap. They have to know there is a problem before they can begin solving it. For example, after noticing that people were spending more money on their pets, a new dog food company created an expensive, high-quality dog food. To emphasize its quality, the dog food was sold in cans and bags with gold labels, red letters, and detailed information about its benefits and nutrients. Yet the product did not sell very well, and the company went out of business in less than a year. Its founders didn’t understand why. When they asked a manager at a competing dog food company what their biggest mistake had been, the answer was, “Simple. You didn’t have a picture of a dog on the package.”49 This problem would have been easy to solve, if management had only been aware of it. Being aware of the gap between a desired state and an existing state isn’t enough to begin the decision-making process. Managers also have to be motivated to reduce the gap. For example, business people have complained for years about unreasonable workplace regulation. Nevertheless, Congress was not interested in solving this “problem” until the Congressional Accountability Act subjected Congress to the same laws as private businesses. Now, like any business, Congress must give overtime pay to anyone who works more than 40 hours a week. Legislative and office assistants, all of whom used to work 60 hours a week, are now limited by law to just 40. To limit hours and overtime pay, no one is allowed to work during lunch (even if they want to). Computers are turned off. Phones go unanswered. Employees can’t even watch C-Span while eating their sandwiches. At 6:00 P.M., office managers walk through the offices, ringing loud bells and turning off lights to force employees who want to keep working to go home. Not surprisingly, these changes have motivated many in Congress to take a second look at the unintended effects that workplace laws and regulations have on businesses.50 Finally, it’s not enough to be aware of a problem and be motivated to solve it. Managers must also have the knowledge, skills, abilities, and resources to fix the problem. So, how did Airbus reduce the weight of its A380 super-jumbo jet? Engineers achieved the biggest weight savings by substituting a light carbonfiber composite material for heavier aluminum in the rear fuselage and the large structural ribs in the wings. Altogether, these changes and others reduced the A380’s weight by four tons.51
4.2 Identify Decision Criteria
1
Define the Problem
2
Identify Decision Criteria
3
Weight the Criteria
4
Generate Alternative Courses of Action
5
Evaluate Each Alternative
6
Compute the Optimal Decision
Decision criteria are the standards used to guide judgments and decisions. Typically, the more criteria a potential solution meets, the better that solution should be. Let’s return to the employee who was given the responsibility for making a rational decision about the office computer setup. What general factors would be important when purchasing computers for the office? Reliability, price, warranty, on-site service, and compatibility with existing software, printers, and computers would all be important, but you would also have to consider the technical details. What specific factors would you want the office computers to have? Well, with technology changing so quickly, you’ll probably want to buy computers with as much capability as you can afford. At the minimum, according to PC Magazine, you’ll probably want a 64-bit 3-gigahertz Pentium 4 or Athlon chip, with 2 to 4 gigabytes of memory, a 160-gig hard drive, a DVD/CD-RW combination drive holding 8 gigabytes of data, a 100 megabit to 1 gigabyte per second network card for high-speed Internet connections, multiple USB and firewire ports to connect external devices like digital cameras and zip
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drives, and a 17-inch flat-screen monitor—all for a price of $1,000 or less!52 These general and specific factors represent the criteria that could guide the purchase of computer equipment.
4.3 Weight the Criteria
REUTERS/LANDOV
After identifying decision criteria, the next step is deciding which criteria are more or less important. Although there are numerous mathematical models for weighting decision criteria, all require the decision maker to provide an initial ranking of the criteria. Some use absolute comparisons, in which each criterion is compared to a standard or ranked on its own merits. For example, Consumer Reports uses this checklist when it rates and recommends new cars: predicted reliability, previous owners’ satisfaction, predicted depreciation (the price you could expect if you sold the car), ability to avoid an accident, fuel economy, crash protection, acceleration, ride, and front seat comfort.53 Exhibit 5.10 shows the absolute weights that someone buying a car might use. Because these weights are absolute, each criterion is judged on its own importance, using a five-point scale, with “5” representing “critically important” and “1” representing “completely unimportant.” In this instance, predicted reliability, fuel economy, and front seat comfort were rated most important, and acceleration and predicted depreciation were rated least important. Another method uses relative comparisons, in which each criterion is compared directly to every other criterion.54 For example, Exhibit 5.11 shows six criteria that someone might use when buying a house. Moving down the first column of Exhibit 5.11, we see that the time of the daily commute has been rated less important (–1) than school system quality; more important (+1) than having an inground pool, sun room, or a quiet street, and just as important as the house being brand new (0). Total weights, which are obtained by summing the scores in each column, indicate that the daily commute and school system quality are the most important factors to this home buyer, while an inground pool, sun room, and a quiet street are the least important. So with relative comparision, criteria are directly compared to each other.
4.4 Generate Alternative Courses of Action After identifying and weighting the criteria that will guide the decision-making process, the next step is to identify possible courses of action that could solve the problem. In general, at this step, the idea is to generate as many alternatives as possible. For instance, let’s assume that you’re trying to select a city in Europe to be the location of a major office. After meeting with your staff, you generate a list of possible alternatives: Amsterdam, the Netherlands; Barcelona or Madrid, Spain; Berlin or Frankfurt, Germany; Brussels, Belgium; London, England; Milan, Italy; Paris, France; and Zurich, Switzerland.
4.5 Evaluate Each Alternative The next step is to systematically evaluate each alternative against each criterion. Because of the amount of information that must be collected, this step can take much longer and be much more expensive than other steps in the decisionmaking process. For example, in selecting a European city for your office, you could contact economic development offices in each city, systematically interview businesspeople or executives who operate there, retrieve and use published government data on each location, or rely on published studies such as Cushman
Airbus A380 is the largest passenger jet ever built. It’s understandable that potential buyers of the twostory super-jumbo jet would be concerned about weight and fuel usage. Nose to tail, it’s longer than this section of terminal where it’s gated, and its 263-foot wingspan is nearly as long as a football field.
absolute comparisons A process in which each decision criterion is compared to a standard or ranked on its own merits.
relative comparisons A process in which each decision criterion is compared directly to every other criterion.
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& Wakefield Healy & Baker’s European Monitor, which conducts an annual survey of more than 500 senior European executives who rate 30 European cities on 12 business-related criteria.55 No matter how you gather the information, once you have it, the key is to systematically use that information to evaluate each alternative against each criterion. For example, Exhibit 5.12 shows how each of the 10 cities on your staff’s list fared on each of the 12 criteria (higher scores are better), from qualified staff to freedom from pollution. Although Paris has good access to markets and very good travel to and from the city, it has a poor business climate and relatively few different languages are spoken in its business community. On the other hand, Barcelona has the lowest costs for employing staff, but weak access to markets and poor ease of travel to and from the city.
5 critically important 4 important 3 somewhat important 2 not very important 1 completely unimportant 1. Predicted reliability
1
2
3
4
5
2. Owner satisfaction
1
2
3
4
5
3. Predicted depreciation
1
2
3
4
5
4. Avoiding accidents
1
2
3
4
5
5. Fuel economy
1
2
3
4
5
6. Crash protection
1
2
3
4
5
7. Acceleration
1
2
3
4
5
8. Ride
1
2
3
4
5
9. Front seat comfort
1
2
3
4
5
Exhibit 5.10
The final step in the decision-making process is to compute the optimal decision by determining each alternative’s optimal value. This is done by multiplying the rating for each criterion (Step 5) by the weight for that criterion (Step 3), and then summing those scores for each alternative course of action that you generated (Step 4). For example, the 500 executives participating in Cushman & Wakefield Healy & Baker’s survey of the best European cities for business rated the 12 decision criteria in terms of importance as follows: qualified staff (59 percent), access to major markets (57 percent), travel to and from the city (51 percent), good telecommunications (46 percent), positive business climate (34 percent), cost of staff (32 percent), cost and value of office space (30 percent), availability of office space (27 percent), travel within the city (21 percent), languages spoken in the business community (20 percent), quality of life (18 percent), and freedom from pollution (12 percent). Those weights are then multiplied by the ratings in each category. For example, Amsterdam’s optimal value of 1.75 (i.e., weighted average) is determined by the following calculation:
Absolute Weighting of Decision Criteria for a Car Purchase
(.59 3 .32) + (.57 3 .44) + (.51 3 .64) + (.46 3 .31) + (.34 3 .56) + (.32 3 .25) + (.30 3 .37) + (.27 3 .34) + (.21 3 .35) + (.20 3 .98) + (.18 3 .31) + (.12 3 .38) = 1.75
Exhibit 5.11 Relative Comparison of Home Characteristic HOME CHARACTERISTICS
4.6 Compute the Optimal Decision
L
Daily commute (L)
SSQ
IP
SR
QS
NBH
+1
–1
–1
–1
0
–1
–1
–1
–1
0
0
+1
0
0
School system quality (SSQ)
–1
Inground pool (IP)
+1
+1
Sun room (SR)
+1
+1
0
Quiet street (QS)
+1
+1
0
0
0
+1
–1
0
0
+2
+5
–3
–2
–2
Newly built house (NBH) Total weight
0
0
The weighted average (or optimal) scores in the next to last row of Exhibit 5.12 show that London clearly ranks as the best location for your company’s new European office because of its large number of qualified staff, easy access to markets, outstanding ease of travel to, from, and within the city, excellent telecommunications, and top-notch business climate.
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4.7 Limits to Rational Decision Making
HE R IGHT T G T H I IN NG DO
In general, managers who diligently complete all six steps of the rational decision-making model will make better decisions than those who don’t. So, when they can, managers should try to follow the steps in the rational decisionmaking model, especially for big decisions with long-range consequences. It’s highly doubtful, however, that rational decision making can always help managers choose optimal solutions that provide maximum benefits to their organizations. The terms optimal and maximum suggest that rational decision making leads to perfect or near-perfect decisions. Of course, for managers to make perfect decisions, they have to operate in perfect worlds with no realworld constraints. For example, in an optimal world, the manager who was given three weeks to define, analyze, and fix computer problems in the office would have followed PC Magazine’s advice to buy all employees the “perfect personal computer” (i.e., 3-gigahertz chip, 2 to 4 gigabytes of memory, etc.). And in arriving at that decision, our manager would not have been constrained by price (“$3,000 per computer? Sure, no problem.”) or time (“Need six more months to decide? Sure, take as long as you need.”). Furthermore, without any constraints, our manager could identify and weight an extensive list of decision criteria, generate a complete list of possible solutions, and then test and evaluate each computer against each decision criterion. Finally, our manager would bounded rationality have the necessary experience and knowledge with computers to easily A decision-making process restricted in the real world by limited resources, make sense of all these sophisticated tests and information. Of course, it never works like that in the real world. Managers face time and incomplete and imperfect information, and managers’ limited decision-making money constraints. They often don’t have time to make extensive lists of decision capabilities. criteria. And they often don’t have the resources to test all possible solutions maximizing against all possible criteria. Choosing the best alternative. The rational decision-making model describes the way decisions should be made. In other words, decision makers wanting to make optimal decisions satisficing should not have to face time and cost constraints. They should have unlimited Choosing a “good enough” alternative. resources and time to generate and test all alternative solutions against all decision criteria. And they should be willing to recommend any decision that produces optimal benefits for the company, even if that decision would harm their own PLUS—A PROCESS FOR ETHICAL DECISION jobs or departments. Of course, very few managers actually MAKING make rational decisions the way they should. The way in People are often unsure how to include which managers actually make decisions is more accurately ethics in their decision-making processes. To described as “bounded (or limited) rationality.” Bounded ratiohelp them, the Ethics Resource Center recnality means that managers try to take a rational approach to ommends using the following PLUS guidedecision making, but are restricted by real-world constraints, lines throughout the various steps of the rational decision-making model: incomplete and imperfect information, and their own limited • P is for policies. Is your decision consisdecision-making capabilities. tent with your organization’s policies, In theory, fully rational decision makers maximize decisions procedures, and guidelines? by choosing the optimal solution. In practice, however, limited • L is for legal. Is your decision acceptable resources, along with attention, memory, and expertise probunder applicable laws and regulations? lems, make it nearly impossible for managers to maximize de• U is for universal. Is your decision concisions. Consequently, most managers don’t maximize—they sistent with your organization’s values “satisfice.” Whereas maximizing is choosing the best alternaand principles? tive, satisficing is choosing a “good enough” alternative. With • S is for self. Does your decision satisfy 24 decision criteria, 50 alternative computers to choose from, your personal sense of right, good, and two computer labs with hundreds of thousands of dollars of fair? The PLUS guidelines can’t guarantee equipment, and unlimited time and money, our manager could ethical decisions, but they can help test all alternatives against all decision criteria and choose the employees be more attentive to ethical is“perfect PC.” In reality, however, our manager’s limited time, sues as they define problems, evaluate altermoney, and expertise mean that only a few alternatives will be natives, and choose solutions.56 assessed against a few decision criteria. In practice, our manager will visit two or three computer or electronic stores, read
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WEIGHTS Amsterdam Barcelona
Berlin Brussels Frankfurt
London
Madrid
Milan
Paris
Zurich
QUALIFIED STAFF
59%
0.32
0.22
0.33
0.38
0.65
1.39
0.24
0.34
0.84
0.23
ACCESS TO MARKETS
57%
0.44
0.18
0.23
0.51
0.72
1.44
0.28
0.41
1.14
0.20
TRAVEL TO/ FROM CITY
51%
0.64
0.14
0.17
0.49
1.20
1.69
0.17
0.22
1.43
0.25
TELECOMMUNICATIONS
46%
0.31
0.08
0.37
0.32
0.76
1.36
0.10
0.18
0.94
0.33
BUSINESS CLIMATE
34%
0.56
0.37
0.30
0.35
0.19
0.65
0.40
0.20
0.24
0.36
COST OF STAFF
32%
0.25
0.71
0.23
0.20
0.09
0.21
0.61
0.29
0.16
0.05
COST & VALUE OF OFFICE SPACE
30%
0.37
0.69
0.38
0.41
0.26
0.24
0.42
0.21
0.30
0.14
AVAILABLE OFFICE SPACE
27%
0.34
0.41
0.52
0.38
0.45
0.60
0.46
0.26
0.40
0.18
TRAVEL WITHIN CITY
21%
0.35
0.48
0.45
0.31
0.39
1.17
0.30
0.21
1.13
0.43
LANGUAGES SPOKEN
20%
0.98
0.14
0.25
0.96
0.51
1.35
0.21
0.22
0.65
0.51
QUALITY OF LIFE
18%
0.31
0.99
0.27
0.28
0.14
0.43
0.54
0.33
0.71
0.41
FREEDOM FROM POLLUTION
12%
0.38
0.44
0.13
0.20
0.17
0.12
0.09
0.05
0.13
0.85
1.75
1.37
1.22
1.65
2.28
4.26
1.23
1.08
3.15
1.13
6
8
5
3
1
7
10
2
9
WEIGHTED AVERAGE [OPTIMAL SCORE] RANKING
4
Source: “European Cities Monitor,” Cushman & Wakefield Healy & Baker, [Online] available at http://www.frankfurt.de/sixcms_upload/media, 26 April 2004.
Exhibit 5.12 Criteria Ratings Used to Determine the Best Locations in Europe for a New Office
a couple of recent computer reviews, and get bids from a couple of local computer stores that sell complete computer systems at competitive prices, as well as from Dell, Gateway, and Hewlett-Packard. The decision will be complete when our manager finds a “good enough” computer that meets a few decision criteria.
Review 4: Steps and Limits to Rational Decision Making Rational decision making is a six-step process in which managers define problems, evaluate alternatives, and compute optimal solutions. The first step is identifying and defining the problem. Problems exist where there is a gap between desired and existing states. Managers won’t begin the decision-making
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process unless they are aware of the gap, motivated to reduce it, and possess the necessary resources to fix it. The second step is defining the decision criteria that are used when judging alternatives. In Step 3, an absolute or relative comparison process is used to rate the importance of the decision criteria. Step 4 involves generating as many alternative courses of action (i.e., solutions) as possible. Potential solutions are assessed in Step 5 by systematically gathering information and evaluating each alternative against each criterion. In Step 6, criterion ratings and weights are used to compute the optimal value for each alternative course of action. Rational managers then choose the alternative with the highest optimal value. The rational decision-making model describes how decisions should be made in an ideal world without limits. However, bounded rationality recognizes that in the real world, managers’ limited resources, incomplete and imperfect information, and limited decision-making capabilities restrict their decisionmaking processes. These limitations often prevent managers from being rational decision makers. 5
USING GROUPS TO IMPROVE DECISION MAKING
According to a study reported in Fortune magazine, 91 percent of U.S. companies use teams and groups to solve specific problems (i.e., make decisions).57 Why do so many companies use teams and groups? The reason is that, when done properly, group decision making can lead to much better decisions than decisions typically made by individuals. In fact, numerous studies show that groups consistently outperform individuals on complex tasks. Let’s explore the 5.1 advantages and pitfalls of group decision making and see how the following group decision-making methods—5.2 structured conflict, 5.3 the nominal group technique, 5.4 the Delphi technique, 5.5 the stepladder technique, and 5.6 electronic brainstorming—can be used to improve decision making.
5.1 Advantages and Pitfalls of Group Decision Making Groups can do a much better job than individuals in two important steps of the decision-making process: defining the problem and generating alternative solutions. Four reasons explain why. First, because group members usually possess different knowledge, skills, abilities, and experiences, groups are able to view problems from multiple perspectives. Being able to view problems from different perspectives, in turn, can help groups perform better on complex tasks and make better decisions than individuals.58 Second, groups can find and access much more information than can individuals alone. At Vignette Corporation, which makes software to help online businesses attract and keep customers, instead of being interviewed by one manager, applicants who pass the initial phone screening are interviewed by eight people with eight different areas of expertise. At the end of the day, when the team meets to decide whether to make a job offer, it has eight kinds of information and eight times as much information to consider.59 Third, the increased knowledge and information available to groups make it easier for them to generate more alternative solutions. Studies show that generating lots of alternative solutions is critical to improving the quality of decisions. Fourth, if groups are involved in the decision-making process, group members will be more committed to making chosen solutions work. Although groups can do a better job of defining problems and generating alternative solutions, group decision making is subject to some pitfalls that can quickly erase these gains. One possible pitfall is groupthink. Groupthink occurs in highly cohesive groups when group members feel intense pressure to agree
groupthink A barrier to good decision making caused by pressure within the group for members to agree with each other.
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with each other so that the group can approve a proposed solution.60 Because groupthink leads to consideration of a limited number of solutions and restricts discussion of any considered solutions, it usually results in poor decisions. Groupthink is most likely to occur under the following conditions: • • • • •
The group is insulated from others with different perspectives. The group is insulated from others with different perspective. The group leader begins by expressing a strong preference for a particular decision. There is no established procedure for systematically defining problems and exploring alternatives. Group members have similar backgrounds and experiences.61
NASA’s decision to launch the ill-fated space shuttle Challenger is an example of groupthink.62 Despite cold weather that would normally have postponed a launch, NASA put heavy pressure on Morton Thiokol (maker of the shuttle’s) O-rings and other engineering firms involved in the launch decision to give their approval to launch. After being told twice that a launch was not recommended, NASA administrators pressured Morton Thiokol one last time for an OK. Because of the pressure and time constraints, Thiokol reversed its decision. Tragically, as Thiokol had originally feared, the O-rings failed, and the shuttle exploded, killing all aboard. There are indications that groupthink, also played a role in the loss of the space shuttle Columbia, in 2003. A second potential problem with group decision making is that it takes considerable time. It takes time to reconcile schedules (so that group members can meet). Furthermore, it’s a rare group that consistently holds productive task-oriented meetings to effectively work through the decision process. Some of the most common complaints about meetings (and thus decision making) are that the meeting’s purpose is unclear, participants are unprepared, critical people are absent or late, conversation doesn’t stay focused on the problem, and no one follows up on the decisions that were made. Not surprisingly, given these difficulties, the Valley News Dispatch, a small paper in Tarentum, Pennsylvania, has this sign in the company conference room: “Are you lonely? Working on your own? Hate making decisions? HOLD A MEETING!”63 A third possible pitfall is that sometimes one or two people, perhaps the boss or a strong-willed, vocal group member, dominate group discussion, restricting consideration of different problem definitions and alternative solutions. Another potential problem is that, unlike with their own decisions and actions, group members may not feel accountable for the decisions made and actions taken by the group. Although these pitfalls can lead to poor decision making, this doesn’t mean that managers should avoid using groups to make decisions. When done properly, group decision making can lead to much better decisions. The pitfalls of group decision making are not inevitable. Managers can overcome most of them by using the various techniques described next.
5.2 Structured Conflict c-type conflict (cognitive conflict) Disagreement that focuses on problem- and issue-related differences of opinion.
Most people view conflict negatively. Yet the right kind of conflict can lead to much better group decision making. C-type conflict, or “cognitive conflict,” focuses on problem- and issue-related differences of opin-ion.64 In c-type conflict, group members disagree because their different experiences and expertise lead them to view the problem and its potential solutions differently. C-type conflict is also characterized by a willingness to examine, compare, and reconcile those differences to produce the best possible solution. Alteon WebSystems, now a division
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of Nortel Networks, makes critical use of c-type conflict. Top manager Dominic Orr described Alteon’s c-type conflict this way:
© AP WIDE WORLD PHOTOS
People arrive with a proposal or a solution—and with the facts to support it. After an idea is presented, we open the floor to objective, and often withering, critiques. And if the idea collapses under scrutiny, we move on to another: no hard feelings. We’re judging the idea, not the person. At the same time, we don’t really try to regulate emotions. Passionate conflict means that we’re getting somewhere, not that the discussion is out of control. But one person does act as referee—by asking basic questions like “Is this good for the customer?” or “Does it keep our time-to-market advantage intact?” By focusing relentlessly on the facts, we’re able to see the strengths and weaknesses of an idea clearly and quickly.65 By contrast, a-type conflict, meaning “affective conflict,” refers to the emotional reactions that can occur when disagreements become personal rather than professional. A-type conflict often results in hostility, anger, resentment, distrust, cynicism, and apathy. Unlike c-type conflict, a-type conflict undermines team effectiveness by preventing teams from engaging in the activities characteristic of c-type conflict that are critical to team effectiveness. Examples of a-type conflict statements are “your idea,” “our idea,” “my department,” “you don’t know what you are talking about,” or “you don’t understand our situation.” Rather than focusing on issues and ideas, these statements focus on individuals.66 Two methods of introducing structured c-type conflict into the group decision-making process are devil’s advocacy and dialectical inquiry. Devil’s advocacy creates c-type conflict by assigning an individual or a subgroup the role of critic. The following five steps establish a devil’s advocacy program: 1. 2. 3. 4. 5.
a-type conflict (affective conflict) Disagreement that focuses on individuals or personal issues.
devil’s advocacy A decision-making method in which an individual or a subgroup is assigned the role of a critic.
Generate a potential solution. Assign a devil’s advocate to criticize and question the solution. Present the critique of the potential solution to key decision makers. Gather additional relevant information. Decide whether to use, change, or not use the originally proposed solution.67
Dialectical inquiry creates c-type conflict by forcing decision makers to state the assumptions of a proposed solution (a thesis) and then generate a solution that is the opposite (antithesis) of the proposed solution. The following are the five steps of the dialectical inquiry process:
1. 2. 3. 4.
When groups have no established procedure for systematically defining problems and exploring alternatives, the consequences can be disastrous. As with the Challenger, reports indicate that groupthink played a role in the Columbia disaster.
Generate a potential solution. Identify the assumptions underlying the potential solution. Generate a conflicting counterproposal based on the opposite assumptions. Have advocates of each position present their arguments and engage in a debate in front of key decision makers. 5. Decide whether to use, change, or not use the originally proposed solution.68
dialectical inquiry A decision-making method in which decision makers state the assumptions of a proposed solution (a thesis) and generate a solution that is the opposite (antithesis) of that solution.
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BMW uses dialectical inquiry in its design process, typically creating six internal design teams to compete against each other to design a new car. After a front-runner or leading design emerges from one of the teams, another team is assigned to design a car that is “diametrically opposed” to the leading design (Step 3 of the dialetical inquiry method).69 When properly used, both the devil’s advocacy and dialectical inquiry approaches introduce c-type conflict into the decision-making process. Further, contrary to the common belief that conflict is bad, studies show that these methods lead to less a-type conflict, improved decision quality, and greater acceptance of decisions once they have been made.70 See the “What Really Works” feature for more information on both techniques.
5.3 Nominal Group Technique nominal group technique A decision-making method that begins and ends by having group members quietly write down and evaluate ideas to be shared with the group.
“Nominal” means “in name only.” Accordingly, the nominal group technique received its name because it begins with “quiet time,” in which group members independently write down as many problem definitions and alternative solutions as possible. In other words, the nominal group technique begins by having group members act as individuals. After the “quiet time,” the group leader asks each group member to share one idea at a time with the group. As they are read aloud, ideas are posted on flipcharts or wallboards for all to see. This step continues until all ideas have been shared. In the next step, the group discusses the advantages and disadvantages of the ideas. The nominal group technique closes with a second “quiet time,” in which group members independently rank the ideas presented. Group members then read their rankings aloud, and the idea with the highest average rank is selected.71 The nominal group technique improves group decision making by decreasing a-type conflict. In doing so, however, it also restricts c-type conflict. Consequently, the nominal group technique typically produces poorer decisions than do the devil’s advocacy and dialectical inquiry approaches. Nonetheless, more than 80 studies have found that nominal groups produce better ideas than those produced by traditional groups.72
5.4 Delphi Technique Delphi technique A decision-making method in which members of a panel of experts respond to questions and to each other until reaching agreement on an issue.
In the Delphi technique, the members of a panel of experts respond to questions and to each other until reaching agreement on an issue. The first step is to assemble a panel of experts. Unlike other approaches to group decision making, however, it isn’t necessary to bring the panel members together in one place. Because the Delphi technique does not require the experts to leave their offices or disrupt their schedules, they are more likely to participate. For example, a colleague and I were asked to conduct a Delphi technique assessment of the “10 most important steps for small businesses.” With the help of the dean of my business school and a former mayor of the city, we assembled a panel of local top-level managers and CEOs. The second step is to create a questionnaire consisting of a series of openended questions for the experts. For example, we asked our panel to answer these questions: “What is the most common mistake made by small-business persons?” “Right now, what do you think is the biggest threat to the survival of most small businesses?” “If you had one piece of advice to give to the owner of a small business, what would it be?” In Step 3, the panel members’ written responses are analyzed, summarized, and fed back to the panel for reactions until the members reach agreement. In our Delphi study, it took about a month to get the panel members’ written responses to the first three questions. Then we summarized their responses in a brief report (no more than two pages). We sent the summary to the panel members and asked them to explain why they agreed or disagreed with these conclusions from the
W H A T
R E A L L Y
W O R K S
Devil’s Advocacy, Dialectical Inquiry, and Considering Negative Consequences Ninety percent of the decisions managers face are wellstructured problems that recur frequently under conditions of certainty. For example, for most retailers, a customer’s request for a refund on a returned item without a receipt is a well-structured problem. It happens every day (recurs frequently), and it’s easy to determine if a customer has a receipt. Well-structured problems are solved with programmed decisions, in which a policy, procedure, or rule clearly specifies how to solve the problem. Thus, there’s no mystery about what to do when someone shows up without a receipt. You allow the item to be exchanged for one of similar value, but you don’t give a refund. In some sense, programmed decisions really aren’t decisions because anyone with any experience knows what to do. No thought is required. What keeps managers up at night is the other 10 percent of problems. Ill-structured problems that are novel (no one’s seen them before) and exist under conditions of uncertainty are solved with nonprogrammed decisions. Nonprogrammed decisions do not involve standard methods of resolution. Every time managers make a nonprogrammed decision, they have to figure out a new way of handling a new problem. That’s what makes the decisions so tough. Both the devil’s advocacy and dialectical inquiry approaches to decision making, along with a related approach, considering negative consequences, can be used to improve nonprogrammed decision making. All three work because they force decision makers to identify and criticize the assumptions underlying the nonprogrammed decisions that they hope will solve illstructured problems.
Devil’s Advocacy 10%
30%
40%
50%
60%
70%
80%
90%
100%
probability of success 58%
DIALECTICAL INQUIRY
There is a 55 percent chance that decision makers who use the dialectical inquiry approach to criticize and question their solutions will produce better decisions than decisions based on the advice of experts. Dialectical Inquiry 10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
probability of success 55%
Note that each technique has been compared to decisions obtained by following experts’ advice. So, although these probabilities of success, 55 percent and 58 percent, seem small, they very likely understate the effects of both techniques. In other words, the probabilities of better decisions would have been much larger if both techniques had been compared to unstructured decision-making processes. GROUP DECISION MAKING AND CONSIDERING NEGATIVE CONSEQUENCES
Considering negative consequences, such as with a devil’s advocate or via critical inquiry, means pointing out the potential disadvantages of proposed solutions. There is an 86 percent chance that groups that consider negative consequences will produce better decisions than those that don’t.73
DEVIL’S ADVOCACY
There is a 58 percent chance that decision makers who use the devil’s advocacy approach to criticize and question their solutions will produce better decisions than decisions based on the advice of experts.
20%
Considering Negative Consequences 10%
20%
30%
40%
50%
60%
probability of success
first round of questions. Asking the members why they agree or disagree is important because it helps uncover their unstated assumptions and beliefs. Again, this process of summarizing panel feedback and obtaining reactions to that feedback continues until the panel members reach agreement. For our study, it took just one more round for the panel members’ to reach a consensus. In all, it took approximately three-and-a-half months to complete our Delphi study. Managers should not use the Delphi technique for common decisions. Because it is a time-consuming, labor-intensive, and expensive process, the Delphi technique is best reserved for important long-term issues and problems.
70%
80% 86%
90%
100%
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Nonetheless, the judgments and conclusions obtained from it are typically better than those you would get from one expert.
5.5 Stepladder Technique
stepladder technique A decision-making method in which group members are added to a group discussion one at a time (i.e., like a stepladder). The existing group members listen to each new member’s thoughts, ideas, and recommendations; then the group shares the ideas and suggestions that it had already considered, discusses the new and old ideas, and makes a decision.
The stepladder technique improves group decision making by ensuring that each member’s contributions are independent, and are considered and discussed by the group. As shown in Exhibit 5.13, the stepladder technique begins with discussion between two group members, who share their thoughts, ideas, and recommendations before jointly making a tentative decision. At each step, as other group members are added to the discussion one at a time, like a stepladder, the existing group members take the time to listen to each new member’s thoughts, ideas, and recommendations. The existing members share the ideas and suggestions that they had already considered, and then the group discusses the new and old ideas and makes a tentative decision. This process (new member’s ideas are heard, group shares previous ideas and suggestions, discussion is held, tentative group decision is made) continues until each group member’s ideas have been discussed. For the stepladder technique to work, group members must have enough time to consider the problem or decision on their own, to present their ideas to the group, and to thoroughly discuss all ideas and alternatives with the group at each step. Rushing through a step destroys the advantages of this technique. Also, groups must make sure that subsequent group members are completely unaware of previous discussions and suggestions. This will ensure that each member who joins the group brings truly independent thoughts and suggestions, thus greatly increasing the chances of making better decisions. One study found that compared to traditional groups in which all group members are present for the entire discussion, groups using the stepladder technique produced significantly better decisions. Moreover, the stepladder groups performed better than the best individual member of their group 56 percent of the time, whereas traditional groups outperformed the best individual member of their group only 13 percent of the time.74 Besides better performance, groups using the stepladder technique also generated more ideas and were more satisfied with the decision-making process. This technique also works particularly well with audioconferencing, in which geographically dispersed group members make decisions via a telephone conference call.75
5.6 Electronic Brainstorming brainstorming A decision-making method in which group members build on each others’ ideas to generate as many alternative solutions as possible.
electronic brainstorming A decision-making method in which group members use computers to build on each others’ ideas and generate many alternative solutions.
production blocking A disadvantage of face-to-face brainstorming in which a group member must wait to share an idea because another member is presenting an idea.
Brainstorming, in which group members build on others’ ideas, is a technique for generating a large number of alternative solutions. Brainstorming has four rules:
1. 2. 3. 4.
The more ideas, the better. All ideas are acceptable, no matter how wild or crazy they might seem. Other group members’ ideas should be used to come up with even more ideas. Criticism or evaluation of ideas is not allowed.
Though brainstorming is great fun and can help managers generate a large number of alternative solutions, it does have a number of disadvantages. Fortunately, electronic brainstorming, in which group members use computers to communicate and generate alternative solutions, overcomes the disadvantages associated with face-to-face brainstorming.76 The first disadvantage that electronic brainstorming overcomes is production blocking, which occurs when you have an idea but have to wait to share it because someone else is already presenting an idea to the group. During this short
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delay, you may forget your idea or decide that it really wasn’t worth sharing. With electronic brainstorming, production blocking doesn’t happen. All group members are seated at computers, so everyone can type in ideas whenever they occur. There’s no “waiting your turn” to be heard by the group. The second disadvantage that electronic brainstorming overcomes is evaluation apprehension, that is, being afraid of what others will think of your ideas. With electronic brainstorming, all ideas are anonymous. When you type in an idea and hit the “Enter” key to share it with the group, group members see only the idea. Furthermore, many brainstorming software programs also protect anonymity by displaying ideas in random order. So, if you laugh maniacally when you type “Cut top management’s pay by 50 percent!” and then hit the “Enter” key, it won’t show up immediately on everyone’s screen. This makes it doubly difficult to determine who is responsible for which comments. In the typical layout for electronic brainstorming, all participants sit in front of computers around a U-shaped table. This configuration allows them to see their computer screens, each other, a large main screen, and a meeting leader or facilitator. Exhibit 5.14 shows what the typical electronic brainstorming group member will see on his or her computer screen. The first step in electronic brainstorming is to anonymously generate as many ideas as possible. Groups commonly generate 100 ideas in a half-hour period. Step 2 is to edit the generated ideas, categorize them, and eliminate redundancies. Step 3 is to rank-order the categorized ideas in terms of quality. Step 4, the last step, has three parts: generate a series of action steps, decide the best order for accomplishing these steps, and identify who is responsible for each step. All four steps are accomplished with computers and electronic brainstorming software.77 Studies show that electronic brainstorming is much more productive than face-to-face brainstorming. Four-person electronic brainstorming groups produce 25 to 50 percent more ideas than four-person regular brainstorming groups, and 12-person electronic brainstorming groups produce 200 percent more ideas than regular groups of the same size! In fact, because production
evaluation apprehension Fear of what others will think of your ideas.
Exhibit 5.13 Stepladder Technique for Group Decision Making
Step 4: Group Member 5 Joins Group • Shares thoughts, ideas, recommendations
Group Members 1, 2, 3, & 4 • Share previous thoughts, ideas, recommendations
Discussion Is Held and Final Group Decision Is Made
Group Members 1, 2, & 3 • Share previous thoughts, ideas, recommendations
Discussion Is Held and Tentative Group Decision Is Made
Group Members 1 & 2 • Share previous thoughts, ideas, recommendations
Discussion Is Held and Tentative Group Decision Is Made
Group Member 2 • Shares thoughts, ideas, recommendations
Discussion Is Held and Tentative Group Decision Is Made
Step 3: Group Member 4 Joins Group • Shares thoughts, ideas, recommendations
Step 2: Group Member 3 Joins Group • Shares thoughts, ideas, recommendations
Step 1: Group Member 1 • Shares thoughts, ideas, recommendations
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blocking (i.e., waiting your turn) is not a problem for electronic brainstorming, the number and quality of ideas generally increase with group size.78 Even though it works much better than traditional brainstorming, electronic brainstorming has disadvantages, too. An obvious problem is the expense of computers, networks, software, and other equipment. As these costs continue to drop, however, electronic brainstorming will become cheaper. Another problem is that the anonymity of ideas may bother people who are used to having their ideas accepted by virtue of their position (i.e., the boss). On the other hand, one CEO said, “Because the process is anonymous, the sky’s the limit in terms of what you can say, and as a result it is more thought-provoking. As a CEO, you’ll probably discover things you might not want to hear but need to be aware of.”79 A third disadvantage is that outgoing individuals who are more comfortable expressing themselves verbally may find it difficult to express themselves in writing. Finally, the most obvious problem is that participants have to be able to type. Those who can’t type, or who type slowly, may be easily frustrated and find themselves at a disadvantage to experienced typists. For example, one meeting facilitator was tipped off that an especially fast typist was pretending to be more than one person. Said the facilitator, “He’d type ‘Oh, I agree’ and then ‘Ditto, ditto’ or ‘What a great idea,’ all in quick succession, using different variations of uppercase and lowercase letters and punctuation. He tried to make it seem like a lot of people were concurring, but it was just him.” Eventually, the person sitting next to him got suspicious and began watching his screen.80
Review 5: Using Groups to Improve Decision Making When groups view problems from multiple perspectives, use more information, have a diversity of knowledge and experience, and become committed to solutions they help choose, they can produce better solutions than individual decision makers. However, group decisions can suffer from these disadvantages: groupthink, slowness, discussions dominated by just a few individuals, and unfelt responsibility for decisions. Group decisions work best when group members encourage c-type conflict. However, group decisions don’t work as well when groups become mired in a-type conflict. The devil’s advocacy and dialectical inquiry approaches improve group decisions because they bring structured c-type conflict into the decision-making process. By contrast, the nominal group technique and the Delphi technique both improve decision making by reducing a-type conflict through limited interactions between group members. The stepladder technique improves group decision making by adding each group member’s independent contributions to the discussion one at a time. Finally, because it overcomes the problems of production blocking and evaluation apprehension, electronic brainstorming is a more effective method of generating alternatives than face-to-face brainstorming. Exhibit 5.14 What You See on the Computer during Electronic Brainstorming
Source: Developing Consensus wth Group Systems. © 2002 GroupSystems.com.
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Key Terms absolute comparisons, 149 action plan, 138 a-type conflict (affective conflict), 155
bounded rationality, 151 brainstorming, 158 budgeting, 146 c-type conflict (cognitive conflict), 154
decision criteria, 148 decision making, 147 Delphi technique, 156 devil’s advocacy, 155 dialectical inquiry, 155 distal goals, 139
electronic brainstorming, 158 evaluation apprehension, 159 goal commitment, 138 groupthink, 153 learning-based planning, 141 management by objectives (MBO), 143
maximizing, 151 mission, 143 nominal group technique, 156 operational plans, 144 options-based planning, 140 planning, 134 policy, 145 problem, 147
procedure, 146 production blocking, 158 proximal goals, 139 rational decision making, 147 relative comparisons, 149 rules and regulations, 146 satisficing, 151 single-use plans, 145 slack resources, 140 S.M.A.R.T. goals, 137 standing plans, 145 stepladder technique, 158 strategic plans, 142 tactical plans, 143 vision, 142
Concept Check 1. What are the benefits and costs of planning? 2. Describe the steps involved in making a plan that works. 3. What are S.M.A.R.T. goals? 4. What are proximal and distal goals? Which type of goals is more effective? 5. How can companies build flexibility into their plans? 6. How do companies use plans at all levels of management?
7. Describe the steps in rational decision making. 8. What are decision criteria and how are they used in decision making? 9. What are the advantages and disadvantages of group decision making? 10. Identify the methods of group decision making and give a brief description of each.
Self-Assessment SELF-MANAGEMENT A key part of planning is setting goals and tracking progress toward their achievement. As a manager, you will be involved in some type of planning in an organization. But the planning process is also used in a personal context, where it is called self-management. Self-management involves setting goals for yourself, developing a method or strategy to achieve them, and then carrying it out. For some people, self-management comes naturally. Everyone seems to know someone who is highly
organized, self-motivated, and disciplined. That someone may even be you. If that someone is not you, however, then you will need to develop your self-management skills as a means to becoming a better manager. To gain insights into your level of self-management, take the 35-question assessment on page 616 of the Self-Assessment Appendix. That assessment will give you some baseline information as a foundation for your later self-management goals (i.e., where you are now so that you can see what you need to do to get where you want to be).
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Management Decision DRUG TESTING The end of the week is always a relief, but this Friday, after everyone clocks out, you have a meeting with the company’s front-line managers to discuss various problems that have been occurring in the warehouse. You’ve been bracing for the challenge since Monday. Once all the managers are assembled, you begin to list the troubles that have been plaguing the warehouse. Petty theft and minor accidents have increased markedly in a relatively short period of time. Employees have run forklifts into walls and dropped pallets of boxes onto the floor as they were being moved. Items have disappeared from shipments being held by the company for its trucking customers. There have even been rumors that marijuana is being bought and sold on the premises. After you recite the laundry list of problems, you tell your managers that you don’t think any single employee is the source of all these problems. Instead, you boldly state your suspicion: drug use is probably the root of the problems in the warehouse. A discernible mumble circles the room, but no one wants to discuss the issue openly. Some managers look worried, others shocked, and the rest—you can’t tell. So you begin slowly by saying, “I think we need to do drug testing. I’m sure we can’t blame all our problems on drug use, but I’m convinced it’s a contributing factor.” You cite several successful companies that are committed to a drug-free workplace and some statistics on how much drug use costs U.S. businesss—$81 billion per year. Testing 100 employees over the course of a year will cost only
about $5,000, but the average substance abuser costs his or her employer between $11,000 and $13,000 per year. Adding to the cost savings, the state gives a 5 percent rebate on workers’ compensation insurance to certified drug-free workplaces. You conclude by saying, “I’ll put together some materials for us to review next week.” Some of your managers nod perfunctorily, but others just raise an eyebrow. As they file out of the room in absolute silence, you murmur under your breath, “That went well,” and let out a sigh. “I might as well get started now. Waiting is not going to make the task easier. But what do I really need to do? And how restrictive should I be?”81 Questions 1. What do you need to establish a drug-free workplace: a policy, a set of procedures, or rules and regulations—or maybe all three? 2. As the manager in question, draft the appropriate operational plan(s) for this situation. Think about issues like random versus regular testing, current employees versus future applicants only, all employees or only warehouse workers, the consequences of testing positive, and so forth. 3. Imagine that your drug-testing policy, whatever form it takes, has resulted in your company losing 40 percent of its work force. (That has actually happened to real companies.) What changes, if any, will you make as a result?
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Management Team Decision SELLING TO WAL-MART Because of your company’s success, the end-of-theyear accounting review is usually an upbeat occasion, and this December is no different. Your company manufactures an innovative kickstand that reduces injuries by keeping a child’s bike from falling all the way to the ground. After the device was written up in a parents’ magazine recently, sales to specialty bike shops—your primary customers—have started to climb. Despite the increased demand, you can still make kickstands to order. At a meeting with your management team, you remark that although sales are increasing at a slow but steady rate, the company still has a large amount of excess capacity. A colleague agrees and then enthusiastically announces, “I know how to take care of that. Let’s sell to Wal-Mart!” A hush falls over the meeting. Becoming a Wal-Mart supplier would be a tremendous commitment for your company. The retailing behemoth gives suppliers a 30-second window to deliver their goods to Wal-Mart distribution centers; you currently ship product via UPS ground. Wal-Mart requires serious price concessions from all its suppliers, a practice that has forced many American manufacturers to outsource production overseas in order to get their production costs low enough to meet Wal-Mart’s pricing mandates. Master Lock, Carolina Mills, Levi’s, and, a bit closer to home, Huffy Bicycle are a few examples. Your company uses local suppliers for metal, paint, plastics, and packaging, and it pays its 25 workers above-market wages. Thankfully, at the moment your company is the only manufacturer of the kickstand, so you have more freedom to set a competitive price on that item. If you begin selling through Wal-Mart, however, imitators will soon follow, and that would definitely affect your already modest margins. Not to mention that Wal-Mart uses historical price data about a company and its competitors to drive prices down across industries. Suppliers are rarely if ever granted a price increase; on the contrary, they are asked for regular price decreases! In addition, if vendors want their products on WalMart’s shelves, they have to implement Wal-Mart’s “customized business plans.” Each year, the big retailer hands its suppliers detailed “strategic business planning packets.” Wal-Mart grades them on weekly, quarterly, and annual report cards. And when it comes to discussion of price, there is no real negotiation even for household brands. Plus, Wal-Mart often requires its suppliers to underwrite the costs of the retailer’s supply chain productivity initiatives, like using radio-frequency identification
(RFID) tags on their products for inventory tracking, a system that can cost between $13 million and $23 milion to put in place. Trying to meet Wal-Mart’s requirements has pushed many small- and medium-sized businesses into bankruptcy. Though business that stay afloat have generally done so by outsourcing to China (in areas like shoes, housewares, and apparel, 80 to 90 percent of WalMart’s inventory comes from China). But there are also benefits to selling to Wal-Mart. You have instant access to the world’s largest global retailing network. Doing things the “Wal-Mart way” inevitably leads to more efficient operations. And the volume! You could sell exponentially more kickstands through Wal-Mart than through the small specialty retailers to whom you currently sell. If doing business with Wal-Mart is so bad, why do Unilever, P&G, and Dial sell 6, 17, and 28 percent of their goods, respectively, to the giant retailer? A former president of Huffy Bicycle once said that Wal-Mart gives you “a chance to compete. If you can’t compete, that’s your problem.” You agree, to a point. Before you can voice any of the pros and cons, another manager expertly sums up the dilemma by saying, “The only thing worse than selling to Wal-Mart is not selling to Wal-Mart.”82 Before you begin this Management Team Decision, each team member will probably need to do some preliminary research on Wal-Mart’s business practices; the Business and Company Resource Center (BCRC) can help you find articles on topics like productivity, inventory management, and even Wal-Mart’s business practices. A visit to the Wal-Mart stores Web site (http://www.walmartstores.com) can give you a wealth of information on how the company manages its suppliers. You may also wish to visit the Web site for Frontline’s program on Wal-Mart (http://www.pbs.org/ wgbh/pages/frontline/shows/walmart/secrets/). Questions 1. As a team, use this exercise to practice one of the group decision-making techniques discussed in the chapter. Work together to decide which technique to use. 2. Do you apply to become a Wal-Mart supplier, with all that entails? Why or why not? 3. If you become a Wal-Mart supplier, what key areas of your operations will need to change and how? 4. Think about how the decision-making technique you chose affected the outcome of your decision. Do you think your collective decision would have been different if you had used, say, dialectical inquiry instead of the stepladder technique?
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Develop Your Career Potential WHAT DO YOU WANT TO BE WHEN YOU GROW UP? What do you want to be when you grow up?83 Still not sure? Ask around. You’re not alone. Chances are, your friends and relatives aren’t certain either. Sure, they may have jobs and careers, but you’re likely to find that, professionally, many of them don’t want to be where they are today. Sometimes, people’s interests change, or they may experience burnout. And some people are unhappy with their current jobs or careers because they were never in the right one to begin with. Getting the job and career you want is not easy. It takes time, effort, and persistence. And even though you will probably follow multiple career paths in your life, your career-planning process will be easier (and more effective) if you take the time to develop a personal career plan. Begin by answering the following questions. (Hint: Treat this seriously. If you do it effectively, this plan could guide your career decisions for the next five to seven years.) 1. Describe your strengths and weaknesses. Don’t just rely on your opinions of your abilities. Ask your parents, relatives, friends, and employers what they think, too. Encourage them to be honest and then be prepared to hear some things that you may not want to hear. Remember, though, this information can help you pick the right job or career.
2. Write an advertisement for the job you want to have five years from now. Be specific. Describe the company, title, responsibilities, required education, and experience, salary, and benefits. Use employment ads in the Sunday job listings as inspiration. 3. Create a detailed plan to obtain this job. In the short term, what classes do you need to take? Should you change your major? Do you need a business major or minor or maybe a minor in a foreign language? What kind of summer work experience will move you closer to getting the job you want five years from now? What job do you need to get right out of college to obtain the work experience you need? Create a specific plan for each of the five years in your career plan, keeping in mind that the plans for later years are likely to change. The value in planning is that it forces you to think about what you want and the steps you can take now to help achieve those goals. 4. Decide when you will monitor and evaluate the progress you’re making with your plan. Career experts suggest that every six months is about right. Pick two dates and write them in your schedule. Furthermore, right now, before you forget, set five specific, challenging goals that you need to accomplish in the next six months in order to achieve your career plans.
Take Two
Biz Flix The Bourne Identity
Jason Bourne (Matt Damon) cannot remember who he is, but others believe he is an international assassin. Bourne tries to learn his identity with the help of his new friend and lover Marie (Franka Potente). Meanwhile, while CIA agents pursue him across Europe trying to kill him, Bourne slowly discovers that he is an extremely well-trained and lethal agent. The story is loosely based on Robert Ludlum’s 1981 novel. This scene is an edited version of the “Bourne’s Game” sequence near the end of the film. Jason Bourne kills the hired assassin who tried to kill him the day after Jason and Marie arrived at the home of Eamon (Tim Dutton). Eamon is Marie’s friend but is a stranger to Jason. Jason uses the dead man’s cell phone after returning to his apartment in Paris, France. He presses the redial button, which connects him to Conklin (Chris Cooper), the CIA manager who is looking for him. Listen carefully to Jason’s conversation with Conklin. What to Watch for and Ask Yourself
1. Does Bourne describe a plan to Conklin? If he does, what are the plan’s elements? What is Bourne’s goal? 2. Does Bourne assess the plan’s execution to determine if it conforms to his goal? If so, what does he do? 3. Was Bourne’s plan successfully carried out? Why or why not? How does this scene relate to organizational strategic planning?
Management Workplace Community Insurance Center
Planning is a crucial part of solid business practices. That’s not to say that you won’t be successful if you don’t plan, but planning can bring clarity and focus to your operation. Community Insurance Center was launched in 1962 in a suburb of Chicago, and over the company’s history, owner Milton Moses has had numerous opportunities to plan and make decisions. What to Watch for and Ask Yourself
1. When Milton Moses says, “We have a basic plan,” what kind of plan is he talking about? 2. How does Community Insurance maintain flexibility in planning? 3. At one point, Milton Moses fired roughly 70 percent of his staff. Using the steps to rational decision making outlined in the chapter, re-create the process Moses likely used to make this risky decision. Activity
1. Use the decision regarding the music and headphones as a base for practicing the devil’s advocacy approach to group decision making. Put together a team of four to five students and assign one team member to play Milton Moses in the role of devil’s advocate, arguing for quiet so people can concentrate. Compare the outcome of your group decision with what happened at Community Insurance.
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C H A P T E R
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Chapter6 What Would You Do? Basics of Organizational Strategy 1. Sustainable Competitive Advantage 2. Strategy-Making Process 2.1 Assessing the Need for Strategic Change 2.2 Situational Analysis 2.3 Choosing Strategic Alternatives
Corporate-, Industry-, and FirmLevel Strategies 3. Corporate-Level Strategies 3.1 Portfolio Strategy 3.2 Grand Strategies
4. Industry-Level Strategies 4.1 Five Industry Forces 4.2 Positioning Strategies 4.3 Adaptive Strategies
5. Firm-Level Strategies 5.1 Direct Competition 5.2 Strategic Moves of Direct Competition 5.3 Entrepreneurship and Intrapreneurship: Entering New Markets
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise
Xtra! Twelve exhibit worksheets, author FAQs, quiz, Management News, and video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
TiVo Headquarters, Alviso, California.1 “Hey, who wants to see last night’s episode of The Apprentice? I TiVo-ed it so we can see who Trump fired this week.” TiVo is the easily programmable digital video recorder (DVR), basically a computer, that automatically records the TV shows you specify so that you can watch them whenever you want. USA Today described TiVO this way: “More than any previous invention, TiVo has detached TV shows from TV networks. If you own a TiVo, you don’t care what channel a show is on. TiVo scoops up everything you want from all the channels and stores it. TiVo users tend to watch TiVo instead of channel surf.” Certainly, TiVo customers love their TiVos; 98 percent “couldn’t live without” them, and 40 percent said they’d rather go without cell phones than their TiVos. Even former Federal Communcations Commission chairman Michael Powell referred to TiVo as “God’s machine.” Xerox, Google, and now TiVo—supposedly, you have arrived when your company’s name becomes an everyday verb. Unfortunately, TiVo is still struggling. Five years after its startup, TiVo has just 1.9 million subscribers, still isn’t profitable, and is facing difficult competition from copycat DVRs made by ReplayTV, Motorola, and ScientificAtlanta. Also, satellite and cable TV providers, including Dish Network, Comcast, and Time Warner, are luring new subscribers with free DVRs, similar to TiVos, that are built into their satellite/cable boxes. For example, the Dish Network’s free DVR allows customers to record, pause live TV, or fast-forward on a 120 gigabyte hard drive that records 100 hours of TV. And whereas TiVo charges $12.95 a month for its subscription service (that feeds TV scheduling information and software updates to your TiVo), Dish Network charges only $5 a month and will waive that charge if you upgrade to its most expensive package of channels. Even DirecTV, which partnered with TiVo to provide TiVo DVRs to DirecTV customers, has sold its shares of TiVo stock and will begin making its own DVRs. With DirecTV customers accounting for 60 to 70 percent of TiVo’s current subscribers, this represents a huge loss of future sales and subscribers for TiVo. Industry analyst Vamsi Sistla, says, “TiVo
What Would You Do?
is going to get hurt, obviously.” Furthermore, telephone companies such as Verizon, SBC, and BellSouth are preparing to offer new television subscription services, including DVRs, and Microsoft is partnering with Comcast to produce an easy-to-use software system for its DVRs. Just when it seemed that the news couldn’t get any worse for TiVo, it did: company founder Mike Ramsay announced that he is resigning as CEO, although he will stay on as chairman. According to Ramsay, TiVo is searching for a more experienced CEO with “new talents we can bring in to move to the next phase” of growth and development. With the loss of its top management and so many threats to its core business, TiVo must address key questions if it is to survive this competitive onslaught. First, does TiVo still have a competitive advantage, and if so, is there any way to fortify it against such strong competition? Industry analyst Brian Wieser says, “TiVo has to find a niche that allows it to survive as a stand-alone entity, [that is] not dependent on distribution from [cable and satellite companies].” Second, with so many copycat DVRs on the market, how can TiVo differentiate its products and STUDY TIP services so that customers Fresh examples of managewill prefer TiVo DVRs to those ment topics can be found provided by its competitors? everyday in the business Finally, should TiVo consider press. Pick up a copy of the an aggressive counterattack against its competitors, such Wall Street Journal and read as significant price cuts or several articles. List the stratthe addition of “free seregy issues facing the compavices”? Would such a strategy nies you read about. help TiVo at this point? If you were going to be the new CEO at TiVo, what would you do?
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In Chapter 5, you learned that strategic plans are overall company plans that clarify how a company intends to serve customers and position itself against competitors over the next two to five years. Although TiVo was the first to sell DVRs, it now faces challenges from numerous competitors and must develop a strategy to recapture its competitive advantage in the DVR business. This chapter begins with an in-depth look at how managers create and use strategies to obtain a sustainable competitive advantage. Then you will learn the three steps of the strategy-making process. Next, you will learn about corporate-level strategies that help managers answer the question: What business or businesses should we be in? You will then examine the industry-level competitive strategies that help managers determine how to compete successfully within a particular line of business. The chapter finishes with a review of the firm-level strategies of direct competition and entrepreneurship.
Basics of Organizational Strategy America Online (AOL), which provides services such as email, Internet access, and chat rooms, grew from one of the smallest online service providers to the largest in less than a decade, quadrupling its customer base and achieving consistently good profits. In fact, AOL’s success enabled it to buy the much larger Time Warner, which owns Time magazine (among others), HBO, Cinemax, CNN, and numerous providers of cable television and high-speed Internet services. Now, however, after several years of poor performance, the combined company’s stock price is just one-third of AOL’s price before it acquired Time Warner. Indeed, in another sign of AOL’s decline, the combined company, once called AOL Time Warner, changed its name to just Time Warner. AOL itself is now just one of Time Warner’s many divisions.2 Although AOL now has 32.7 million subscribers, its two closest competitors, MSN (the Microsoft Network) and Earthlink, trail with 8.95 million and 5.3 million subscribers each. Plus, its market share among Internet service providers has actually shrunk from above 52 percent to 24 percent, as it loses market share to high-speed cable providers like Comcast and high-speed DSL providers like SBC and Verizon!3 How can a company like AOL, which dominates an industry, though much less completely than before, keep its competitive advantage? What steps can AOL and other companies take to better manage the strategy-making process? 1 2
1 resources The assets, capabilities, processes, information, and knowledge that an organization uses to improve its effectiveness and efficiency, create and sustain competitive advantage, and fulfill a need or solve a problem.
competitive advantage Providing greater value for customers than competitors can.
After reading the next two sections, you should be able to indicate the components of sustainable competitive advantage and explain why it is important. describe the steps involved in the strategy-making process.
SUSTAINABLE COMPETITIVE ADVANTAGE
Resources are the assets, capabilities, processes, information, and knowledge that an organization controls. Firms use their resources to improve organizational effectiveness and efficiency. Resources are critical to organizational strategy because they can help companies create and sustain an advantage over competitors.4 Organizations can achieve a competitive advantage by using their resources to provide greater value for customers than competitors can. For example, AOL created competitive advantage for itself and value for its customers through its simplicity. To get online with AOL, you put its software in your computer, typed “Install,” and followed the directions (entered your name, credit card number, etc.) as the software automatically dialed AOL’s free sign-up number.5 In less than five minutes, you were an AOL subscriber with full online access.
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Though signing up like this for online service is commonplace today, AOL was the first company to make it this easy. Furthermore, AOL’s easy-to-understand menus, icons, and instructions made the process simple and intuitive, even for those who knew little about computers. AOL customer George LeMien of Bethel, Connecticut, said, “I like [AOL’s] ease of use, especially how it helps guide me around the Net.”6 Other online services were more difficult to use. The goal of most organizational strategies is to create and then sustain a competitive advantage. A competitive advantage becomes a sustainable competitive sustainable competitive advantage when other companies cannot duplicate the value a firm is providing to advantage customers. Sustainable competitive advantage is not the same as a long-lasting A competitive advantage that other companies have tried unsuccessfully to competitive advantage, though companies obviously want a competitive advantage duplicate and have, for the moment, to last a long time. Instead, a competitive advantage is sustained if competitors stopped trying to duplicate. have tried unsuccessfully to duplicate the advantage and have, for the moment, stopped trying to duplicate it. It’s the corporate equivalent of your competitors saying, “We give up. You win. We can’t do what you do, and we’re not even going to try to do it any more.” As Exhibit 6.1 shows, four conditions must be met if a firm’s resources are to be used to achieve a sustainable competitive advantage. The resources must be valuable, rare, imperfectly imitable, and nonsubstitutable. Valuable resources allow companies to improve their efficiency and effective- valuable resources ness. Unfortunately, changes in customer demand and preferences, competitors’ Resources that allow companies to actions, and technology can make once-valuable resources much less valuable. improve efficiency and effectiveness. For example, when AOL charged $9.95 a month for five online hours and $2.95 for every additional hour, it had sufficient resources, meaning phone lines, network computers, and available support staff, to successfully handle the business growth it was experiencing. When it first switched to a flat-rate plan with unlimited connection hours, however, those once-valuable resources became an obstacle to efficiency and effectiveness because they could not keep up with surging customer demand for online access. To this day, AOL is still rare resources plagued by network complaints of frequent busy signals, which prevent users Resources that are not controlled or possessed by many competing firms. from connecting, and dropped connections once they finally get through.7 For sustained competitive advantage, valuable resources must also be rare resources. Think about it. How can a company sustain a competitive advantage if all of its competitors have similar resources and capabilities? Consequently, rare resources, resources that are not controlled or possessed by many competing imperfectly imitable resources firms, are necessary to sustain a competitive advantage. When AOL first created Resources that are impossible or the ability to automatically charge monthly bills to customers’ credit cards, none extremely costly or difficult for other firms to duplicate. of its competitors were offering this service. Any competitive advantage gained from this was short-lived, however; within months, other online services and Internet providers had the same capability. What was initially a rare resource, the Exhibit 6.1 Four Requirements for Sustainable capability to bill to credit cards, had become commonplace. Competitive Advantage As the example shows, valuable, rare resources can create temporary competitive advantage. For sustained competitive advantage, however, other firms must be unable to imitate or find Valuable Rare substitutes for those valuable, rare resources. Imperfectly imitable Resources Resources resources are impossible or extremely costly or difficult to duplicate. For example, despite numerous attempts by competitors to imitate them, AOL’s ease-of-use and simplicity initially were an imperfectly Sustainable imitable resource. PC Magazine once wrote: “AOL’s graphical Competitive interface, with menus made up of single-click art icons, folders, and Advantage other documents, is a best-of-breed design. The total effect is coherent and easy to navigate. Some interface elements are even animated, adding still more visual appeal.”8 Indeed, over its first Imperfectly NonImitable Substitutable decade in the online service business, AOL’s ease-of-use and Resources Resources intuitive design helped it displace first CompuServe and then Prodigy as the industry leader. Today, though, both MSN and
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nonsubstitutable resource A resource that produces value or competitive advantage and has no equivalent substitutes or replacements.
Exhibit 6.2 American Online 9.0’s Design Interface
EarthLink have created simple software interfaces, MSN 9.0 and EarthLink Total Access, for much easier email, Web browsing, chat and messaging software, and file uploads and downloads. Cnet.com and PC Magazine consistently rank MSN and EarthLink as better and easier to use than AOL.9 For example, Cnet.com wrote, “Compared with rival AOL, MSN Premium presents better features in a cleaner interface—with fewer overlapping windows and simpler pull-down menus.”10 You can compare AOL 9.0 and MSN 9.0 for yourself in Exhibits 6.2 and 6.3. Today, AOL’s imperfectly imitable resources—intuitive design and ease-of-use—aren’t that different from those of its competitors, and the competitive advantage that AOL created with its easy-to-use software has clearly slipped away. Valuable, rare, imperfectly imitable resources can produce sustainable competitive advantage only if they are also nonsubstitutable resources, meaning that no other resources can replace them and produce similar value or competitive advantage. For example, as described above, the resource that brought AOL its strongest competitive advantage is its simplicity and ease-of-use. In the Internet service provider (ISP) business, this resource has proved valuable, rare, and imperfectly imitable. AOL’s service and connectivity problems (i.e., busy signals and dropped connections), however, have made customers aware that other ISPs are potential substitutes for online access. For example, when people first started going online, they were happy to pay AOL $9.95 a month for five online hours and $2.95 for every additional hour. But when competitors began offering flat-rate plans with unlimited connection hours, AOL’s market share began to shrink. Today, AOL’s $23.95 per month dial-up flat-rate plan includes free virus software and firewall protection. However, NetZero and PeoplePC, which offer unlimited connection hours for less than $11 a month, are taking away AOL’s price-conscious customers. And, for just a few more dollars per month than AOL’s slower $23.95 dial-up plan, consumers who want high-speed Internet connections can go to Verizon, SBCYahoo, or Comcast.11
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Exhibit 6.3 MSN 9.0’s Design Interface
Furthermore, MSN, SBC-Yahoo, and AT&T Worldnet are aggressively pursuing new customers, especially AOL’s, by offering free software (see http:// www.trueswitch.com) that automates the process of switching from one ISP to another. TrueSwitch automatically copies all of your personal data (email files, calendar data, Internet favorites, etc.) to your new ISP account, forwards your new email address to everyone in your address book, forwards your email from your old address to your new address, and cancels your account. Walter Mossberg, the technology columnist at the Wall Street Journal, wrote: “TrueSwitch is especially popular with people leaving AOL. That’s partly because AOL is the largest dial-up ISP, and it has been bleeding members to broadband services offered by cable and phone companies. But it’s also because, unlike many smaller ISPs, AOL has deliberately made it hard to switch by using proprietary software and formats from which it’s difficult to extract data like email and addresses.”12 In summary, AOL’s resources that provide customers with simplicity and ease-of-use have been valuable, rare, and, in the past, imperfectly imitable. But, if customers decide that the Internet access provided by ISPs is an acceptable substitute, then AOL will not have a sustainable competitive advantage. Indeed, PC Magazine’s latest survey of dial-up and broadband ISP customers found that AOL customers were the most dissatisfied with monthly fees, connection speed, connection reliability, email, customer service, and technical support and were by far the least likely to recommend their Internet service to others. And who received the highest overall satisfaction ratings? For dial-up access, the winners were EarthLink and MSN. For broadband access, they were Cox Cable, Optimum Online, and Roadrunner.13
Review 1: Sustainable Competitive Advantage Firms can use their resources to create and sustain a competitive advantage, that is, to provide greater value for customers than competitors can. A competitive advantage becomes sustainable when other companies cannot duplicate the benefits it provides and have, for now, stopped trying. To provide a sustainable competitive advantage, the firm’s resources must be valuable (capable of
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improving efficiency and effectiveness), rare (not possessed by many competing firms), imperfectly imitable (extremely costly or difficult to duplicate), and nonsubstitutable (competitors cannot substitute other resources to produce similar value). 2
STRATEGY-MAKING PROCESS
Companies use a strategy-making process to create strategies that produce sustainable competitive advantage.14 Exhibit 6.4 displays the three steps of the strategymaking process: 2.1 assess the need for strategic change, 2.2 conduct a situational analysis, and then 2.3 choose strategic alternatives. Let’s examine each of these steps in more detail.
2.1 Assessing the Need for Strategic Change The external business environment is much more turbulent than it used to be. With customers’ needs constantly growing and changing, and with competitors working harder, faster, and smarter to meet those needs, the first step in strategy making is determining the need for strategic change. In other words, the company should determine whether it needs to change its strategy to sustain a competitive advantage.15 Determining the need for strategic change might seem easy to do, but in reality, it’s not. There’s a great deal of uncertainty in strategic business environments. Furthermore, top-level managers are often slow to recognize the need for strategic change, especially at successful companies that have created and competitive inertia A reluctance to change strategies or sustained competitive advantages. Because they are acutely aware of the competitive practices that have been strategies that made their companies successful, they continue to rely on those successful in the past. strategies, even as the competition changes. In other words, success often leads to competitive inertia—a reluctance to change strategies or competitive practices Exhibit 6.4 that have been successful in the past. Three Steps of the Strategy-Making For example, Kraft Foods makes some of the best-selling food brands Process around, such as Oreo cookies, Lunchables (prepackaged lunches for children), and Step 1 Step 2 Step 3 Velveeta cheese. But Kraft hasn’t introduced a successful new brand since it began selling Assess Need for Conduct Situational Choose Strategic DiGiorno frozen pizza in the mid-1990s. Strategic Change Analysis Alternatives Instead, Kraft has focused on brand extensions, developing “new and improved” versions of its best-selling brands, such as “mini Oreos, E Strengths Chocolate Cream Oreos, Fudge Mint Oreos, N I Mint and Crème Oreos, and Uh-Oh Oreos.”16 V N • Distinctive Risk-Avoiding I Unfortunately, Kraft’s competitive inertia—its T Competence R Strategies E reliance on extending already established O • Core R N brands and its reluctance to develop new Capability • Avoid Competitive N M ones—has hurt its performance. According to Inertia A E L the Wall Street Journal, “years of failing to deWeaknesses N • Look for Strategic Strategic T velop new categories and products has given Dissonance (Are Reference strategic actions Kraft a lineup that seems stuck in a time E Points consistent with the warp.”17 Indeed, Jennifer Stoll, who used to Opportunities N E company’s straV buy Kraft’s food brands, says, “My perception X • Environmental tegic intent?) I T Scanning of Kraft is that they are the more expensive R • Strategic E version of processed food ‘junk.’”18 Groups O R Risk-Seeking • ShadowN So, besides being aware of the dangers of N Strategy Strategies M Task Force A competitive inertia, what can managers do to E L improve the speed and accuracy with which Threats N T they determine the need for strategic change?
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One method is to actively look for signs of strategic dissonance. Strategic dissonance is a discrepancy between a company’s intended strategy and the strategic actions managers take when actually implementing that strategy.19 For example, when Edgar Bronfman, Jr. bought the struggling Warner Music Group, his strategy was to cut costs and change a company culture where excessive spending—not uncommon in the entertainment industry—was the norm. Accordingly, he hoped to send a strong message with his first move, laying off 1,200 employees to save $250 million. Then, to drive the point home, he cut remaining salaries by as much as 50 percent. Bronfman justified the cuts by saying that managers, lawyers, accountants, and salespeople shouldn’t be earning double or triple their normal salaries just because they worked for a music company. A few weeks later, however, he contradicted his new costcutting strategy. First, he signed off on a $13,000 bill to charter a private jet to fly top company managers and the agents of the company’s best-selling artists 300 miles, roughly a one-hour flight, to the Grammy awards in Los Angeles. Then, despite his insistence that music industry professionals shouldn’t be paid more than their counterparts in other industries, Bronfman quietly restored the salary cuts he had made after top executives complained.20 Finally, while strategic dissonance can indicate that managers are not doing what they should to carry out company strategy, it can also mean that the intended strategy is out of date and needs to be changed.
strategic dissonance A discrepancy between a company’s intended strategy and the strategic actions managers take when implementing that strategy.
situational (SWOT) analysis An assessment of the strengths and weaknesses in an organization’s internal environment and the opportunities and threats in its external environment.
2.2 Situational Analysis
IS ETHICS AN OVERLOOKED SOURCE OF COMPETITIVE ADVANTAGE? Volvo’s reputation for selling safe cars has been a source of competitive advantage for years. You didn’t buy a boxy Volvo for its looks; you bought it because your family would be well protected in an accident. If safety can be a source of competitive advantage, could ethics be one, too? Though competitive advantage usually comes from physical capital (plant, equipment, finances), organizational capital (structure, planning, systems), and human capital (skills, judgment, adaptability of your work force), Johnson & Johnson is still widely admired, two decades afterwards for its response when several people died after someone put cyanide in Tylenol caplets. It quickly pulled Tylenol from store shelves and introduced tamper-proof packaging. The move cost the company half a billion dollars, but protected consumers from further harm. Should ethics be your first source of competitive advantage? Probably not. It makes more sense to start with low costs, good service, or unique product capabilities. But when you’re looking for another way to create or sustain a competitive advantage, consider that a reputation as an ethical corporation may be an additional way to differentiate your company from the competition.23
HE R IGHT T G T H I IN NG DO
A situational analysis can also help managers determine the need for strategic change. A situational analysis, also called a SWOT analysis for strengths, weaknesses, opportunities, and threats, is an assessment of the strengths and weaknesses in an organization’s internal environment and the opportunities and threats in its external environment.21 Ideally, as shown in Step 2 of Exhibit 6.4, a SWOT analysis helps a company determine how to increase internal strengths and minimize internal weaknesses while maximizing external opportunities and minimizing external threats. When IKEA, the global furniture company, conducts a SWOT analysis, it asks its product-strategy council, a group of widely traveled executives, to identify global trends or opportunities. One trend they observed is that kitchens are now used for entertaining instead of living rooms. But with tiny kitchens in Asian homes, slightly larger kitchens in European homes, and even larger kitchens in U.S. homes, how could IKEA design products that would appeal to consumers in such different markets? IKEA used a price matrix (high, medium, or low) to identify holes, or missing products, in its own lineup and then compared its products in each part of the matrix with those of its competitors, which were focusing on selling expensive kitchen islands. IKEA determined that no one was offering inexpensive kitchen products for small apartments or offices. Accordingly, it came up with a new product opportunity, the small kitchen, meaning cabinets, sink, stove, and refrigerator, for the amazingly low price of $650.22 As this example illustrates, IKEA’s competitive advantage is the ability to design, manufacture, and sell stylish, goodvalue, low-cost furniture. However, competitive advantages can erode over time if internal strengths eventually become weaknesses. Consequently, an analysis of an organization’s
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Strategy Making for Firms, Big and Small Companies create strategies that produce sustainable competitive advantage by using the strategy-making process (assessing the need for strategic change, conducting a situational analysis, and choosing strategic alternatives). For years, it had been thought that strategy making was something that only large firms could do well. It was believed that small firms did not have the time, knowledge, or staff to do a good job of strategy making. However, two meta-analyses indicate that strategy making can improve the profits, sales growth, and return on investment of both big and small firms.
firms that engage in the strategy-making process will have more sales growth than small firms that don’t. Likewise, there is a 62 percent chance that small firms that engage in the strategy-making process will have a larger return on investment than small companies that don’t. Thus, in practical terms, the strategy-making process can make a significant difference in a small company’s profits and growth, too. Strategic Planning & Sales Growth for Small Companies 10%
There is a 72 percent chance that big companies that engage in the strategy-making process will be more profitable than big companies that don’t. Not only does strategy making improve profits, but it also helps companies grow. Specifically, there is a 75 percent chance that big companies that engage in the strategy-making process will have greater sales and earnings growth than big companies that don’t. Thus, in practical terms, the strategy-making process can make a significant difference in a big company’s profits and growth. Strategic Planning & Profits for Big Companies 20%
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EXTERNAL GROWTH THROUGH ACQUISITIONS
One way to grow a company is through external growth, or buying other companies (see Section 3.1 on portfolio strategy). However, researchers have long debated whether buying other companies actually adds value to the acquiring company. A meta-analysis based on 103 studies and a sample of 25,205 companies indicates that, on average, acquiring other companies actually hurts the value of the acquiring firm. In other words, there is only a 45 percent chance that growing a company through external acquisitions will work! 24
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distinctive competence What a company can make, do, or perform better than its competitors.
core capabilities The internal decision-making routines, problem-solving processes, and organizational cultures that determine how efficiently inputs can be turned into outputs.
internal environment, that is, a company’s strengths and weaknesses, often begins with an assessment of its distinctive competencies and core capabilities. A distinctive competence is something that a company can make, do, or perform better than its competitors. For example, Consumer Reports magazine consistently ranks Toyota cars number one in quality and reliability.25 Likewise, for 13 of the last 14 years, PC Magazine readers have ranked Dell’s desktop computers best in terms of service and reliability.26 Whereas distinctive competencies are tangible—for example, a product or service is faster, cheaper, or better—the core capabilities that produce distinctive competencies are not. Core capabilities are the less visible, internal decisionmaking routines, problem-solving processes, and organizational cultures that determine how efficiently inputs can be turned into outputs.27 Distinctive
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competencies cannot be sustained for long without superior core capabilities. IKEA’s core capability is the way it works with 1,800 suppliers in 55 countries that make products exclusively for IKEA. IKEA employees in 43 local trading offices work closely with these suppliers to improve quality, cut costs, and improve worker safety. When IKEA develops a new product, such as the $650 small kitchen, the trading offices, with the help of their suppliers, compete to earn the right to produce that product. IKEA uses the same approach for product design, encouraging its nine in-house designers and 80 freelance designers to compete to come up with the best design. This ability to work with so many suppliers and designers, to get them to compete to achieve the best design and the lowest-cost manufactured product, and to keep suppliers happy by guaranteeing them a high volume of work is the core capability that generates IKEA’s distinctive competence, selling good-value, low-cost furniture, which it does better than anyone else in the world.28 After examining internal strengths and weaknesses, the second part of a situational analysis is to look outside the company and assess the opportunities and threats in the external environment. In Chapter 3, you learned that environmental scanning involves searching the environment for important events or issues that might affect the organization. With environmental scanning, managers usually scan the environment to stay up-to-date on important factors in their environment, such as pricing trends and technology changes in the industry. In a situational analysis, however, managers use environmental scanning to identify specific opportunities and threats that can either improve or harm the company’s ability to sustain its competitive advantage. Identification of strategic groups and formation of shadow-strategy task forces are two ways to do this. Strategic groups are not “actual” groups; they are companies, usually competitors, that managers closely follow. More specifically, a strategic group is a group of other companies within an industry that top managers choose for comparing, evaluating, and benchmarking their company’s strategic threats and opportunities.29 (Benchmarking involves identifying outstanding prac-tices, processes, and standards at other companies and adapting them to your own company.) Typically, managers include companies as part of their strategic group if they compete directly with those companies for customers or if those companies use strategies similar to theirs. For example, it’s likely that the managers at Gannett Company, the largest U.S. newspaper publisher (101 daily newspapers and USA Today), assess strategic threats and opportunities by comparing themselves to a strategic group consisting of the other major newspaper companies.30 To assist us in these comparisons, Exhibit 6.5 shows the number of newspapers, TV stations, Web sites, and other businesses that Gannett has in comparison to Knight Ridder, the Tribune Company, the New York Times Company, and Dow Jones Publishing. In fact, when scanning the environment for strategic threats and opportunities, managers tend to categorize the different companies in their industries as core, secondary, and transient firms.31 Core firms are the central companies in a strategic group. Except in number of TV stations, Knight Ridder (31 daily newspapers, including the Detroit Free Press, the Philadelphia Inquirer, and the Miami Herald, 158 Web sites, and a total circulation of 8.9 million readers) is clearly the closest to Gannett and would probably be classified as the core firm in Gannett’s strategic group.32 By contrast, given that Gannett owns 101 daily newspapers in 43 states with a total circulation approaching 7.6 million readers, it’s unlikely that Gannett’s management worries much about the Arkansas Democrat Gazette. The Gazette is a fine paper and has won numerous awards for its writing and news coverage, but with a total circulation of 183,000, mostly in Arkansas, it would probably not be included in Gannett’s strategic
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strategic group A group of companies within an industry that top managers choose to compare, evaluate, and benchmark strategic threats and opportunities.
core firms The central companies in a strategic group.
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group.33 When most managers scan their environments for strategic threats and opportunities, they concentrate on the strategic actions of core firms, not unrelated 101 158 130 firms like the Gazette. Where does the New York Times Company fit in? Over the last few years, the New York Times Company has actually become a mini-Gannett, concentrating its 160 resources in newspapers (19 newspapers, 21 140 31 including the New York Times, the Boston 120 Globe, the International Herald Tribune), 100 0 40 Web sites, and eight TV stations.34 9 14 68 80 26 Nonetheless, because of its small size, Gannett 60 19 Gannett’s managers might not classify it as 0 40 Knight Ridder a core firm. 40 8 20 19 12 Secondary firms are firms that use strate0 gies related to but somewhat different from Tribune Company 3 25 4 those of core firms. The Tribune Company, which has a proportionate number of Web New York Times 12 sites and slightly more TV stations than Gannett, but significantly fewer newspapers (14 Dow Jones newspapers, including the Chicago Tribune, the Orlando Sentinel, Newsday, and the Los Angeles Times, and a total circulation of 9.3 million), would probably be classified as a 35 Managers are aware of the potential secondary firm in Gannett’s strategic group. Exhibit 6.5 Strategic Groups for Gannett threats and opportunities posed by secondary firms, but they spend more time asCompany sessing the threats and opportunities associated with core firms. Transient firms are companies whose strategies are changing from one stratesecondary firms gic position to another. With the Wall Street Journal and Barron’s, the Dow The firms in a strategic group that Jones Company has been a publisher of daily and weekly financial news since follow strategies related to but somewhat different from those of the core its inception. While those publications continue to thrive, in the last decade firms. Dow Jones has considerably broadened its business, starting SmartMoney, a monthly personal investment magazine, and moving into television as a cotransient firms owner of CNBC, the leading business and financial cable TV channel in the The firms in a strategic group whose United States, Europe, and Asia.36 Because it has such a small number of TV strategies are changing from one stations and Web sites, Dow Jones bears little resemblance to Gannett and strategic position to another. might not be included in Gannett’s strategic group. No doubt Gannett would monitor what Dow Jones does because the Wall Street Journal and USA Today are both national papers with similar circulations, but it would make more sense to concentrate on Knight Ridder and the Tribune Company instead. Note, however, that because the strategies of transient firms are changing, managers may not know what to think about these firms. Consequently, managers may overlook or be wrong about the potential threats and opportunities posed by transient firms. So, what external threats and opportunities did Gannett see after assessing its strategic group? In terms of threats, Gannett saw little chance for growth in several areas and sold all five of its remaining radio stations and its outdoor advertising company (i.e., billboards). In terms of opportunities, Gannett has focused on technology and television. In the last few years, it has established Gannett Media Technologies International, a software publishing company designed to help newspapers manage multimedia databases and print and electronic advertising, and purchased five television stations. It has also expanded overseas, purchasing Newsquest plc, one of the largest regional publishers in England with 17 daily newspapers, as well as Newscom, which has
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four papers in the United Kingdom. Finally, continuing to focus on its core business, Gannett acquired 19 daily newspapers in Wisconsin, Ohio, Louisiana, Maryland, and Utah. It also bought two new flagship papers, the Arizona Republic and the Indianapolis Star.37 Because top managers tend to limit their attention to the core firms in their strategic group, some companies have started using shadow-strategy task forces to more aggressively scan their environments for strategic threats and opportunities. A shadow-strategy task force actively seeks out its own company’s weaknesses and then, thinking like a competitor, determines how other companies could exploit them for competitive advantage.38 Furthermore, to make sure that the task force challenges conventional thinking, its members should be independent-minded, come from a variety of company functions and levels, and have the access and authority to question the company’s current strategic actions and intent. For example, Ciba-Geigy’s Industrial Dye division makes color dyes used in carpet manufacturing. One of the difficulties in this business is ensuring color consistency, that is, making sure that the dark gray carpet manufactured next week will be the same dark gray color as the carpet manufactured today. Ciba-Geigy’s shadow-strategy task force determined that if its competitors could find ways to consistently, precisely, and cheaply match color carpet dyes (so that carpet colors looked the same regardless of when and where they were manufactured), Ciba-Geigy would be at a considerable competitive disadvantage. After the shadow-strategy task force challenged top management with its conclusions, the company went about developing distinctive competencies in dye research and manufacturing, which allowed it to make dyes with scientific preciseness.39 In short, a situational analysis has two basic parts. The first is to examine internal strengths and weaknesses by focusing on distinctive competencies and core capabilities. The second is to examine external opportunities and threats by focusing on environmental scanning, strategic groups, and shadow-strategy task forces.
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shadow-strategy task force A committee within a company that analyzes the company’s own weaknesses to determine how competitors could exploit them for competitive advantage.
2.3 Choosing Strategic Alternatives After determining the need for strategic change and conducting a situational analysis, the last step in the strategy-making process is to choose strategic alternatives that will help the company create or maintain a sustainable competitive advantage. According to Strategic Reference Point Theory, managers choose between two basic alternative strategies. They can choose a conservative, risk-avoiding strategy that aims to protect an existing competitive advantage. Or they can choose an aggressive, risk-seeking strategy that aims to extend or create a sustainable competitive advantage. For example, Menards is a hardware store chain with 170 locations throughout the Midwest.40 When hardware giant Home Depot entered the Midwest, Menards faced a basic choice: avoid risk by continuing with the strategy it had in place before Home Depot’s arrival or seek risk by trying to further its competitive advantage against Home Depot, which is six times its size. Some of its competitors decided to fold. Kmart closed all of its Builder’s Square hardware stores when Home Depot came to Minneapolis. Handy Andy liquidated its 74 stores when Home Depot came to the Midwest. But Menards decided to fight, spending millions to open 35 new stores at the same time that Home Depot was opening 44 of its new stores.41 The choice to be risk seeking or risk avoiding typically depends on whether top management views the company as falling above or below strategic reference points. Strategic reference points are the targets that managers use to measure whether their firm has developed the core competencies that it needs to achieve a sustainable competitive advantage. For example, if a hotel chain decides to
strategic reference points The strategic targets managers use to measure whether a firm has developed the core competencies it needs to achieve a sustainable competitive advantage.
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compete by providing superior quality and service, then top management will track the success of this strategy through customer surveys or published hotel ratings, such as those provided by the prestigious Mobil Travel Guide. By contrast, if a hotel chain decides to compete on price, it will regularly conduct market surveys to check the prices of other hotels. The competitors’ prices are the hotel managers’ strategic reference points against which to compare their own pricing strategy. If competitors can consistently underprice them, then the managers need to determine whether their staff and resources have the core competencies to compete on price. As shown in Exhibit 6.6, when a company is performing above or better than its strategic reference points, top management will typically be satisfied with the company’s strategy. Ironically, this satisfaction tends to make top management conservative and risk-averse. After all, since the company already has a sustainable competitive advantage, the worst thing that could happen would be to lose it. Consequently, new issues or changes in the company’s external environments are viewed as threats. In contrast, when a company is performing below or worse than its strategic reference points, top management will typically be dissatisfied with the company’s strategy. In this instance, managers are much more likely to choose a daring, risk-taking strategy. After all, if the current strategy is producing substandard results, the company has nothing to lose by switching to risky new strategies in the hopes that it can create a sustainable competitive advantage. Consequently, managers of companies in this situation view new issues or changes in external environments as opportunities for potential gain. Strategic Reference Point Theory is not deterministic, however. Managers are not predestined to choose risk-averse or risk-seeking strategies for their companies. Indeed, one of the most important elements of the theory is that managers can influence the strategies chosen by their company by actively changing and adjusting the strategic reference points they use to judge strategic performance. To illustrate, if a company has become complacent after consistently surpassing its strategic reference points, then top management can
Exhibit 6.6
Current Situation • Satisfied • Sitting on top of the world
Strategic Reference Points
Perception of New Issues • Threats • Potential loss • Negativity
Response or Behavior • Risk-Averse • Conservative • Defensive
Strategic Reference Points
Perception of New Issues • Opportunity • Gain • Positivity
Response or Behavior • Risk-Taking • Daring • Offensive
Undesired Result Desired Result
Current Situation • •
Dissatisfied At the bottom looking up
Source: A. Fiegenbaum, S. Hart, & D. Schendel, “Strategic Reference Point Theory,” Strategic Management Journal 17 (1996): 219–235.
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PHOTO COURTESY OF LA CROSSE TRIBUNE, WISCONSIN
change from a risk-averse to a risk-taking orientation by raising the standards of performance (i.e., strategic reference points). Indeed, this is what happened at Menards. Instead of being satisfied with just protecting its existing stores (a risk-averse strategy), founder John Menard changed the strategic referent points the company had been using to assess strategic performance. To encourage a daring, offensive-minded strategy that would allow the company to open nearly as many new stores as Home Depot, he determined that Menards would have to beat Home Depot on not one or two, but four strategic reference points: price, products, sales per square foot, and “friendly accessibility.” The strategy appears to be succeeding. In terms of price, market research indicates that a 100-item shopping cart of goods is consistently cheaper at Menards.42 In terms of products, Menards sells 50,000 products per store, the same as Home Depot. In terms of sales per square foot, Menards ($407 per square foot) outsells Home Depot ($371 per square foot).43 Finally, unlike Home Depot’s warehouse-like stores, Menards’ stores are built to resemble grocery stores. Shiny tiled floors, wide aisles, and easy-to-reach products all make Menards a “friendlier” place for shoppers.44 And now with Lowe’s, the second largest hardware store chain in the nation, also entering its markets, Menards has added a fifth strategic reference point, store size. At 225,000 square feet, most new Menards stores are more than double the size of Home Depot’s stores and 75,000 square feet larger than Lowe’s.45 John Caulfield, who wrote a book about Home Depot and the hardware business, said, “Menards is clearly throwing the gauntlet down at Lowe’s. They’re saying, ‘If you come into Chicago, here is what you’re going to face.’”46 So even when (perhaps especially when) companies have achieved a sustainable competitive advantage, top managers must adjust or change strategic reference points to challenge themselves and their employees to develop new core competencies for the future. In the long run, effective organizations will frequently revise their strategic reference points to better focus managers’ attention on the new challenges and opportunities that occur in their ever-changing business environments.
Review 2: Strategy-Making Process The first step in strategy making is determining whether a strategy needs to be changed to sustain a competitive advantage. Because uncertainty and competitive inertia make this difficult to determine, managers can improve the speed and accuracy of this step by looking for differences between top management’s intended strategy and the strategy actually implemented by lower-level managers (i.e., strategic dissonance). The second step is to conduct a situational analysis that examines internal strengths and weaknesses (distinctive competencies and core capabilities), as well as external threats and opportunities (environmental scanning, strategic groups, and shadow-strategy task forces). In the third step of strategy making, Strategic Reference Point Theory suggests that when companies are performing better than their strategic reference points, top management will typically choose a risk-averse strategy. When performance is below strategic reference points, risk-seeking strategies are more likely to be chosen. Importantly, however, managers can influence the choice of strategic alternatives by actively changing and adjusting the strategic reference points they use to judge strategic performance.
When Home Depot came to Chicago, Menards implemented an aggressive strategy to expand its presence in the region. It opened more stores and stocked them with as much inventory as the national chain. Because Menards are built to resemble a grocery store more than a warehouse, however, the merchandise seems more accessible, and that has translated into greater sales per square foot that its rival.
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Corporate-, Industry-, and Firm-Level Strategies To formulate effective strategies, companies must be able to answer these three basic questions: • What business are we in? • How should we compete in this industry? • Who are our competitors, and how should we respond to them? These simple, but powerful questions are at the heart of corporate-, industry-, and firm-level strategies. 3 4 5
3 corporate-level strategy The overall organizational strategy that addresses the question “What business or businesses are we in or should we be in?”
After reading the next three sections, you should be able to explain the different kinds of corporate-level strategies. describe the different kinds of industry-level strategies. explain the components and kinds of firm-level strategies.
CORPORATE-LEVEL STRATEGIES
Corporate-level strategy is the overall organizational strategy that addresses the question “What business or businesses are we in or should we be in?” Malachi Mixon, chairman and CEO of Invacare Corporation, explains how Invacare changed its corporate-level strategy from just a “wheelchair company” to a “home-medical-products company”:
When I led the [leveraged buyout] of Invacare . . . , the company had sales of $19 million, no new products were under development and the principal product was a line of standard wheelchairs. The wheelchair market was monopolized by a much larger company, eight times our size, with access to capital through the public market. As I walked around the company and visited with our 350 associates, I asked them, “What business are we in? What should we become?” The answer was always the same: “We make standard wheelchairs. We should become a larger wheelchair company.” Every day I would tell someone that Invacare would become No. 1 in wheelchairs; but more than that, we were a home-medical-products company and that we should be the world leaders in this field. Initially, no one believed this vision. But after a few years, the buy-in began and soon everyone became excited when they experienced the explosive growth and began to believe this vision was possible. Today, Invacare is on the NYSE and is the world leader in the manufacture and distribution of medical products used in the home. Sales exceed $1 billion and the original market stock capitalization has grown from $1 million to over $1 billion. Associates number 5,500. The defining moment was clearly associate buy-in to the worldwide home-medical-products vision.47 On the next page, Exhibit 6.7 shows the two major approaches to corporate-level strategy that companies use to decide which businesses they should be in: 3.1 portfolio strategy48 and 3.2 grand strategies.
3.1 Portfolio Strategy diversification A strategy for reducing risk by buying a variety of items (stocks or, in the case of a corporation, types of businesses) so that the failure of one stock or one business does not doom the entire portfolio.
One of the standard strategies for stock market investors is diversification: buy stocks in a variety of companies in different industries. The purpose of this strategy is to reduce risk in the overall stock portfolio (i.e., the entire collection of stocks). The basic idea is simple: if you invest in 10 companies in 10 different industries, you won’t lose your entire investment if one company performs poorly. Furthermore, because they’re in different industries, one company’s losses are likely to be offset by another company’s gains. Portfolio strategy is based on these same ideas. We’ll start by taking a look at the theory and ideas
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behind portfolio strategy and then proceed with a criti- PORTFOLIO STRATEGY GRAND STRATEGIES cal review that suggests that some of the key ideas be• Acquisitions, unrelated • Growth hind portfolio strategy are not supported. diversification, related Portfolio strategy is a corporate-level strategy that diversification, single minimizes risk by diversifying investment among various businesses businesses or product lines. Just as a diversification strat• Stability egy guides an investor who invests in a variety of stocks, • Boston Consulting Group matrix portfolio strategy guides the strategic decisions of corpo• Stars • Retrenchment/recovery rations that compete in a variety of businesses. For ex• Question marks ample, it could be used to guide the strategy of a • Cash cows company like 3M, which makes 55,000 products for • Dogs seven different business sectors: consumers and offices (Post-Its, scotch tape, etc.); display and graphics (for computers, cell phones, PDAs, TVs); electro and communications (flexible Exhibit 6.7 Corporate-Level Strategies circuits used in printers and electronic displays); health care (medical, surgical, dental, and personal care products); industrial (tapes, adhesives, supply chain software); safety, security, and protection services (glass safety, fire protection, portfolio strategy respiratory products); and transportation (products and components for the A corporate-level strategy that minimanufacture, repair, and maintenance of autos, aircraft, boats, and other mizes risk by diversifying investment vehicles).49 Similarly, portfolio strategy could be used by Johnson & Johnson, among various businesses or product which has 200 divisions making health-care products for the pharmaceutical, lines. diagnostic, consumer, and health-care professionals markets.50 Furthermore, just as investors consider the mix of stocks in their stock portfolio when deciding which stocks to buy or sell, managers following portfolio strategy try to acquire companies that fit well with the rest of their corporate portfolio and to sell those that don’t. Portfolio strategy provides the following guidelines to help them do this. First, according to portfolio strategy, the more businesses in which a corporation competes, the smaller its overall chances of failing. Think of a corporation as a stool and its businesses as the legs of the stool. The more legs or businesses added to the stool, the less likely it is to tip over. Using this analogy, portfolio strategy reduces 3M’s risk of failing because the corporation’s survival depends on essentially seven different business sectors. Because the emphasis is on adding “legs to the stool,” managers who use portfolio strategy are often on the acquisition The purchase of a company by another lookout for acquisitions, that is, other companies to buy. Second, beyond adding new businesses to the corporate portfolio, portfolio company. strategy predicts that companies can reduce risk even more through unrelated unrelated diversification diversification—creating or acquiring companies in completely unrelated busi- Creating or acquiring companies in nesses (more on the accuracy of this prediction later). According to portfolio completely unrelated businesses. strategy, when businesses are unrelated, losses in one business or industry should have minimal effect on the performance of other companies in the corporate portfolio. One of the best examples of unrelated diversification is Samsung Corporation of Korea. Samsung has businesses in electronics (computer memory chips, computer and telecommunication equipment, color TV picture tubes, glass bulbs); machinery and heavy industries (shipbuilding, construction, airplane engine manufacturing, fiber optics, semiconductors); chemicals (engineering plastics, and specialty chemicals); financial services (life and accident insurance, credit cards, and financial securities and trusts); and other areas ranging from automobiles to hotels and entertainment.51 Because most internally grown businesses tend to be related to existing products or services, portfolio strategy suggests that acquiring new businesses is the BCG matrix A portfolio strategy, developed by the preferred method of unrelated diversification. Third, investing the profits and cash flows from mature, slow-growth Boston Consulting Group, that categorizes a corporation’s businesses by businesses into newer, faster-growing businesses can reduce long-term risk. growth rate and relative market share, The best-known portfolio strategy for guiding investment in a corporation’s helping managers decide how to businesses is the Boston Consulting Group (BCG) matrix. The BCG matrix is a invest corporate funds.
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portfolio strategy that managers use to categorize their corporation’s businesses by growth rate and relative market share, helping them decide how to invest corporate funds. The matrix, shown in Exhibit 6.8, separates businesses into four categories based on how fast the market is growing (high-growth or low-growth) and the size of the business’s share of that market (small or star large). Stars are companies that have a large share of a fast-growing market. A company with a large share of a To take advantage of a star’s fast-growing market and its strength in that marfast-growing market. ket (large share), the corporation must invest substantially in it. The investment is usually worthwhile, however, because many stars produce sizable fuquestion mark ture profits. Question marks are companies that have a small share of a A company with a small share of a fast-growing market. If the corporation invests in these companies, they may fast-growing market. eventually become stars, but their relative weakness in the market (small share) makes investing in question marks more risky than investing in stars. cash cow Cash cows are companies that have a large share of a slow-growing market. A company with a large share of a Companies in this situation are often highly profitable, hence the name “cash slow-growing market. cow.” Finally, dogs are companies that have a small share of a slow-growing dog market. As the name “dogs” suggests, having a small share of a slow-growth A company with a small share of a market is often not profitable. slow-growing market. Since the idea is to redirect investment from slow-growing to fast-growing companies, the BCG matrix starts by recommending that while the substantial cash flows from cash cows last, they should be reinvested in stars (see arrow 1 in Exhibit 6.8) to help them grow even faster and obtain even more market share. Using this strategy, current profits help produce future profits. Over time, as their market growth slows, some stars may turn into cash cows (see arrow 2). Cash flows should also be directed to some question marks (see arrow 3). Though riskier than stars, question marks have great potential because of their fast-growing market. Managers must decide which question marks are most likely to turn into stars, and therefore warrant furExhibit 6.8 ther investment, and which ones are too risky and should be sold. Over time, Boston Consulting Group Matrix hopefully some questions marks will become stars as their small markets Question Marks can become large ones (see arrow 4). FiCompany A Company A become 4 Stars. nally, because dogs lose money, the Question corporation should “find them new Stars High owners” or “take them to the pound.” Marks In other words, dogs should either be sold to other companies or be closed down and liquidated for their assets Company C Company D (see arrow 5). Company B Although the BCG matrix and other Stars can 1 3 become forms of portfolio strategy are relatively Cash sh s Cash Cows. Ca low popular among managers, portfolio Flows F 2 strategy has some drawbacks. The most Company G significant is that contrary to the predicCompany C tions of portfolio strategy, the evidence Cash Cows Dogs does not support the usefulness of acquiring unrelated businesses. As shown Low in Exhibit 6.9, there is a U-shaped relationship between diversification and Company E risk. The left side of the curve shows Company H that single businesses with no diversifiCompany F cation are extremely risky (if the single Sold Small Large business fails, the entire business fails). 5 So, in part, the portfolio strategy of diRelative Market Share versifying is correct—competing in a
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Risk
variety of different businesses can lower risk. However, High portfolio strategy is partly wrong, too—the right side of the curve shows that conglomerates composed of completely unrelated businesses are even riskier than single, undiversified businesses. A second set of problems with portfolio strategy has to do with the dysfunctional consequences that occur when companies are categorized as stars, cash cows, question marks, or dogs. Contrary to expectations, Low the BCG matrix often yields incorrect judgments about a Single Related Unrelated Business Diversification Diversification company’s future potential. This is because it relies on past performance (i.e., previous market Source: Republished with permission of Academy of Management, P.O. share and previous market Box 3020, Briar Cliff Manor, NY, 10510-8020. M. Lubatkin & P. J. Lane, The Merger Mavens Still Have It Wrong!” Academy of Managegrowth), which is a notoriously “Psst... ment Executive 10 (1996): 21–39. Reproduced with permission of the poor predictor of future company publisher via Copyright Clearance Center, Inc. performance. For example, from 1930 until about 10 years ago, Yellow Book, the yellow pages phone directory publisher, was a tiny publisher of community phone directories in Long Island, New York. With phone companies such as Verizon and SBC accounting for 96 percent of the $14 billion yellow pages business, there was no reason, based on its undistinguished past, to expect Yellow Book to suddenly become successful. With only a sliver of a slow-growing market, Yellow Book was undoubtedly a “dog” according to the BCG matrix. In the last decade, however, Yellow Book has had remarkable growth. By aggressively cutting prices (in some markets, charging 40% to 50% less than Verizon’s SuperPages), it increased its annual sales from $46 million to over $1 billion. It now has a 10 percent share of the yellow pages directory market and sells 500+ yellow pages directories that are used by 72 million people in 42 states.52 Furthermore, using the BCG matrix can also weaken the strongest performer in the corporate portfolio, the cash cow. As funds are redirected from cash cows to stars, corporate managers essentially take away the resources needed to take advantage of the cash cow’s new business opportunities. As a result, the cash cow becomes less aggressive in seeking new business or in defending its present business. For example, Procter & Gamble’s Tide, the laundry detergent that P&G brought to market in 1946, is clearly a cash cow, accounting for billions in worldwide revenues. A few years ago, however, in a bid to bring new products to market—P&G hadn’t successfully introduced a top-selling new product since Pampers in 1961—the company was diverting up to half a billion dollars from cash cows like Tide to promote potential product blockbusters (i.e., stars) such as Febreze, a spray that eliminates odors; Dryel, which dry cleans clothes at home; Fit, a spray that kills bacteria on fruits and vegetables; and Impress, a high-tech plastic wrap.53 Finally, labeling a top performer as a cash cow can harm employee morale. Cash cow employees realize that they have inferior status and that instead of working for themselves, they are now working to fund the growth of stars and question marks. P&G
Exhibit 6.9 U-Shaped Relationship between Diversification and Risk
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related diversification Creating or acquiring companies that share similar products, manufacturing, marketing, technology, or cultures.
ultimately reversed the diversion of funds from its cash cows as CEO A. G. Lafley refocused the company on biggest brands (i.e., cash cows).54 So, what kind of portfolio strategy does the best job of helping managers decide which companies to buy or sell? The U-shaped curve in Exhibit 6.9 indicates that, contrary to the predictions of portfolio strategy, the best approach is probably related diversification, in which the different business units share similar products, manufacturing, marketing, technology, or cultures. The key to related diversification is to acquire or create new companies with core capabilities that complement the core capabilities of businesses already in the corporate portfolio. We began this section with the example of 3M and its 55,000 products sold in over seven different business sectors. While seemingly different, most of 3M’s product divisions are based in some fashion on its distinctive competencies in adhesives and tape (e.g., wet or dry sandpaper, Post-It notes, Scotchgard fabric protector, transdermal skin patches, reflective material used in traffic signs, etc.). Furthermore, all of 3M’s divisions share its strong corporate culture that promotes and encourages risk taking and innovation. In sum, in contrast to a single, undiversified business or unrelated diversification, related diversification reduces risk because the different businesses can work as a team, relying on each other for needed experience, expertise, and support. Exhibit 6.10 details the problems associated with portfolio strategy and recommends ways that managers can increase their chances of success through related diversification.
grand strategy A broad corporate-level strategic plan used to achieve strategic goals and guide the strategic alternatives that managers of individual businesses or subunits may use.
Exhibit 6.10
3.2 Grand Strategies A grand strategy is a broad strategic plan used to help an organization achieve its strategic goals.55 Grand strategies guide the strategic alternatives that managers of individual businesses or subunits may use in deciding what businesses they should be in. There are three kinds of grand strategies: growth, stability, and retrenchment/recovery.
Portfolio Strategy: Problems and Recommendations Problems with Portfolio Strategy
Recommendations for Making Portfolio Strategy Work
Unrelated diversification does not reduce risk.
Don’t be so quick to sell dogs or question marks. Instead, management should commit to the markets in which it competes by strengthening core capabilities. Put your “eggs in similar (not different) baskets” by acquiring companies in related businesses. Acquire companies with complementary core capabilities.
Present performance is used to predict future performance. Assessments of a business’s growth potential are often inaccurate Cash cows fail to aggressively pursue opportunities and defend themselves from threats. Being labeled a “cash cow” can hurt employee morale. Companies often overpay to acquire stars.
Encourage collaboration and cooperation between related firms and businesses within the company. ”Date before you marry.” Work with a business before deciding to acquire it. When in doubt, don’t acquire new businesses. Mergers and acquisitions are inherently risky and difficult to make work. Only acquire firms that can help create or extend a sustainable competitive advantage.
Acquiring firms often treat acquired stars as “conquered foes.” Key stars’ managers, who once controlled their own destiny, often leave because they are now treated as relatively unimportant middle managers. Sources: M. Lubatkin, “Value-Creating Mergers: Fact or Folklore?” Academy of Management Executive 2 (1988): 295–302; M. Lubatkin & S. Chatterjee, “Extending Modern Portfolio Theory into the Domain of Corporate Diversification: Does It Apply?” Academy of Management Journal 37 (1994): 109–136. M. H. Lubatkin & P. J. Lane, “Psst . . . The Merger Mavens Still Have It Wrong!” Academy of Management Executive 10 (1996): 21–39.
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The purpose of a growth strategy is to increase profits, revenues, market share, or the number of places (stores, offices, locations) in which the company does business. Companies can grow in several ways. They can grow externally by merging with or acquiring other companies in the same or different businesses. Some of the largest mergers and acquisitions of recent years include Procter & Gamble acquiring Gillette (consumer products), Kmart acquiring Sears (retailing), and Verizon acquiring MCI, SBC acquiring AT&T, Cingular Wireless acquiring AT&T Wireless, and Sprint acquiring Nextel Communications (all telecommunications).56 Another way to grow is internally, directly expanding the company’s existing business or creating and growing new businesses. For example, over the last decade, Walgreen’s, one of the largest pharmacy chains in the United States, opened approximately 100 stores a year. With baby boomers aging and the need for more pharmacies to sell prescription drugs growing rapidly, Walgreen’s opened 425 new stores last year and will shoot for 500 this year. In fact, with 4,582 stores in 44 states, it hopes to have 7,000 stores by 2010.57 Walgreen’s CEO says, “Growth is a huge challenge, but it’s the right thing to do. And this is absolutely the right time in our history to do it.” Because Walgreen’s stores tend to draw customers from only a one- to two-mile radius, each additional store should add significant revenues and profits without cannibalizing existing stores’ sales.58 The purpose of a stability strategy is to continue doing what the company has been doing, but just do it better. Consequently, companies following a stability strategy try to improve the way in which they sell the same products or services to the same customers. For example, Subaru has been making four-wheel-drive station wagons for 30 years. But over the last decade, it strengthened this focus by manufacturing only all-wheel-drive vehicles, like the Subaru Legacy and Outback (both come in four-door sedans or two-door coupes), which are popular in snowy and mountainous regions. Subaru’s extremely loyal customers have rewarded the company with an average 7 percent annual increase in sales (extremely high for the auto industry) over the last 10 years.59 Companies often choose a stability strategy when their external environment doesn’t change much or after they have struggled with periods of explosive growth. The purpose of a retrenchment strategy is to turn around very poor company performance by shrinking the size or scope of the business or, if a company is in multiple businesses, by closing or shutting down different lines of the business. The first step of a typical retrenchment strategy might include making significant cost reductions; laying off employees; closing poorly performing stores, offices, or manufacturing plants; or closing or selling entire lines of products or services.60 For example, each time Home Depot, Menards, Lowe’s, or Wal-Mart opened stores near Dave Umber’s three Ace Hardware stores, the number of customers in his stores dropped by 10 percent. So, after losing $110,000 over two years, Umber began cutting. He said, “I had to walk up to people who’ve been employees of mine for years and say, ‘I’ve got to let you go. You’re a great person, but I can’t afford to pay you anymore.’ It was hard.” He also reduced health benefits, eliminated bonuses, chopped his advertising budget by $20,000, saved $500 a month by using efficient fluorescent light bulbs, and made sure prices were within 10 percent of his competitors. Says Umber, “If it’s the difference between $1.09 and $1.29, customers don’t care, particularly if it saves them from having to run across town to Home Depot. But if something is $10 more, they will.”61 After cutting costs and reducing a business’s size or scope, the second step in a retrenchment strategy is recovery. Recovery consists of the strategic actions that a company takes to return to a growth strategy. This two-step process of cutting and recovery is analogous to pruning roses. Prior to each growing season, roses should be cut back to two-thirds their normal size. Pruning doesn’t
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growth strategy A strategy that focuses on increasing profits, revenues, market share, or the number of places in which the company does business.
stability strategy A strategy that focuses on improving the way in which the company sells the same products or services to the same customers.
retrenchment strategy A strategy that focuses on turning around very poor company performance by shrinking the size or scope of the business.
recovery The strategic actions taken after retrenchment to return to a growth strategy.
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damage the roses; it makes them stronger and more likely to produce beautiful, fragrant flowers. The retrenchment-and-recovery process is similar. Cost reductions, layoffs, and plant closings are sometimes necessary to restore companies to “good health.” But like pruning, those cuts are intended to allow companies to eventually return to growth strategies (i.e., recovery). So, when company performance drops significantly, a strategy of retrenchment and recovery may help the company return to a successful growth strategy.
Review 3: Corporate-Level Strategies Corporate-level strategies, such as portfolio strategy and grand strategies, help managers determine what businesses they should be in. Portfolio strategy focuses on lowering business risk by being in multiple, unrelated businesses and by investing the cash flows from slow-growth businesses into faster-growing businesses. One portfolio strategy, the BCG matrix, suggests that cash flows from cash cows should be reinvested in stars and in carefully chosen question marks. Dogs should be sold or liquidated. Portfolio strategy has several problems, however. Acquiring unrelated businesses actually increases risk rather than lowering it. The BCG matrix is often wrong when predicting companies’ future potential (i.e., dogs, cash cows, etc.). And redirecting cash flows can seriously weaken cash cows. The most successful way to use the portfolio approach to corporate strategy is to reduce risk through related diversification. The three kinds of grand strategies are growth, stability, and retrenchment/ recovery. Companies can grow externally by merging with or acquiring other companies, or they can grow internally through direct expansion or creating new businesses. Companies choose a stability strategy—selling the same products or services to the same customers—when their external environment changes very little or after they have dealt with periods of explosive growth. Retrenchment strategy, shrinking the size or scope of a business, is used to turn around poor performance. If retrenchment works, it is often followed by a recovery strategy that focuses on growing the business again. 4 industry-level strategy A corporate strategy that addresses the question “How should we compete in this industry?”
INDUSTRY-LEVEL STRATEGIES
Industry-level strategy addresses the question “How should we compete in this
industry?” Let’s find out more about industry-level strategies, shown in Exhibit 6.11, by discussing 4.1 the five industry forces that determine overall levels of competition in an industry and 4.2 the positioning strategies and 4.3 adaptive strategies that companies can use to achieve sustained competitive advantage and above-average profits.
4.1 Five Industry Forces According to Harvard professor Michael Porter, five industry forces—character of rivalry, threat of new entrants, threat of substitute products or services, bargaining power of suppliers, and bargaining power of buyers—determine an Exhibit 6.11 Industry-Level Strategies
Five Industry Forces
Positioning Strategies
Adaptive Strategies
Character of rivalry
Cost leadership
Defenders
Threat of new entrants
Differentiation
Analyzers
Threat of substitute products or services
Focus
Prospectors
Bargaining power of suppliers Bargaining power of buyers
Reactors
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industry’s overall attractiveness and potential for long-term profitability. The stronger these forces, the less attractive the industry becomes to corporate investors because it is more difficult for companies to be profitable. Porter’s industry forces are illustrated in Exhibit 6.12. Let’s examine how these industry forces are bringing changes to several kinds of industries. Character of the rivalry is a measure of the intensity of competitive behavior between companies in an industry. Is the competition among firms aggressive and cutthroat, or do competitors focus more on serving customers than on attacking each other? Both industry attractiveness and profitability decrease when rivalry is cutthroat. For example, selling cars is a highly competitive business. Pick up a local newspaper on Friday, Saturday, or Sunday morning, and you’ll find dozens of pages of car advertising (“Anniversary Sale-A-Bration,” “Ford March Savings!” and “$99 Down, You Choose!”). In fact, competition is so intense that if it weren’t for used-car sales, repair work, and replacement parts, many auto dealers would actually lose money. The threat of new entrants is a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry. If new companies can easily enter the industry, then competition will increase, and prices and profits will fall. However, if there are sufficient barriers to entry, such as large capital requirements to buy expensive equipment or plant facilities or the need for specialized knowledge, then competition will be weaker, and prices and profits will generally be higher. For instance, high costs and intense competition make it very difficult to successfully enter the videogame business. With today’s average video game taking 12 to 36 months to create, $5 million to $10 million to develop, and teams of high-paid creative workers that have the skills to develop realistic graphics, captivating story lines, and innovative game capabilities while also being disciplined enough to meet budgets and very strict deadlines and still produce efficient, reliable, bug-free code, the barriers to entry for this business are obviously extremely high. And with already dominant firms like EA Sports chalking up $3 billion in sales, 60 percent profit margins, 254 percent annual growth over the last three years, $2.4 billion in cash, and no debt, it will be extremely difficult to enter the video game industry and be successful.62 The threat of substitute products or services is a measure of the ease with which customers can find substitutes for an industry’s products or services. If customers can easily find substitute products or services, the competition will be greater, and profits will be lower. If there are few or no substitutes, competition will be weaker, and profits will be higher. Generic medicines are some of the best-known
character of the rivalry A measure of the intensity of competitive behavior between companies in an industry.
threat of new entrants A measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry.
threat of substitute products or services A measure of the ease with which customers can find substitutes for an industry’s products or services.
Exhibit 6.12 Porter’s Five Industry Forces
Threat of New Entrants
Bargaining Power of Suppliers
Character of Rivalry
Bargaining Power of Buyers
Threat of Substitute Products or Services
Source: Adapted with permission of The Free Press, a Division of Simon & Schuster, Inc. M. E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980). (c) 1980 by the Free Press.
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bargaining power of suppliers A measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs.
bargaining power of buyers A measure of the influence that customers have on a firm’s prices.
examples of substitute products. Under U.S. patent law, a company that develops a drug has exclusive rights to produce and market that drug for 20 years. During this time, if the drug sells well, prices and profits are generally high. After 20 years, however, the patent will expire, and any pharmaceutical company can manufacture and sell the same drug. When this happens, drug prices drop substantially, and the company that developed the drug typically sees its revenues drop sharply. For example, the last year that Prozac, a medication that fights depression, was under patent, it cost $30 a pill and returned $2.7 billion in sales revenues to Eli Lilly & Co. In contrast, fluoxetine, a generic version of Prozac made by Merck-Medco that became available the day the patent for Prozac expired, costs only $5 per pill. As a result, Eli Lilly lost 90 percent of its Prozac business within one year. It faces a similar loss of revenue when patent protection ends for Zyprexa, its even more successful schizophrenia drug.63 Bargaining power of suppliers is a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs. When companies can buy parts, materials, and services from numerous suppliers, the companies will be able to bargain with the suppliers to keep prices low. On the other hand, if there are few suppliers, or if a company is dependent on a supplier with specialized skills and knowledge, then the suppliers will have the bargaining power to dictate price levels. Today, there are so many suppliers of inexpensive, standardized parts, computer chips, and video screens that dozens of new companies are beginning to manufacture flat-screen TVs. One of those companies is Xoceco (ZO-say-co), a Chinese company that has made inexpensive, low-quality TVs for 19 years. But with dozens of companies able to supply the high-tech parts it needs, Xoceco is now entering the flat-screen TV market without having to spend millions of dollars on research and development. Instead, it is simply buying the parts and software it needs directly from suppliers, assembling the TVs in its Chinese factories, and then undercutting the prices of now struggling market leaders like Sony.64 Bargaining power of buyers is a measure of the influence that customers have on the firm’s prices. If a company sells a popular product or service to multiple buyers, then the company has more power to set prices. By contrast, if a company is dependent on just a few high-volume buyers, those buyers will typically have enough bargaining power to dictate prices. For example, with 5,170 stores and 138 million weekly shoppers, Wal-Mart is the largest single buyer in the history of retailing. Wal-Mart buys 30 percent of all toothpaste, shampoo, and paper towels made by retail suppliers; 15 to 20 percent of all CDs, videos, and DVDs; 15 percent of all magazines; 14 percent of all groceries; and 20 percent of all toys. And, of course, Wal-Mart uses its purchasing power as a buyer to push down prices. Wal-Mart’s Gary Meyers, a vice president of global procurement, admits that “as things get more competitive [in the retail industry], the pressure that comes along with that, yeah, we try to take advantage of it.”65
4.2 Positioning Strategies
cost leadership The positioning strategy of producing a product or service of acceptable quality at consistently lower production costs than competitors can so that the firm can offer the product or service at the lowest price in the industry.
After analyzing industry forces, the next step in industry-level strategy is to protect your company from the negative effects of industry-wide competition and to create a sustainable competitive advantage. According to Michael Porter, there are three positioning strategies: cost leadership, differentiation, and focus. Cost leadership means producing a product or service of acceptable quality at consistently lower production costs than competitors so that the firm can offer the product or service at the lowest price in the industry. Cost leadership protects companies from industry forces by deterring new entrants, who will have to match low costs and prices. Cost leadership also forces down the prices of substitute products and services, attracts bargain-seeking buyers, and increases bargaining power with suppliers, who have to keep their prices low if they want to do business with the cost leader. For example, although it sells the occasional
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COURTESY OF WHIRLPOOL CORPORATION
$106,000 diamond ring or $11,000 Lalique crystal vase, thousands of $3,000 42-inch plasma televisions, and too many cases of $90 Dom Perignon champagne to count, Costco, the second largest warehouse chain (behind Sam’s), has a simple strategy—ultra low costs. At Costco, nothing, not even the $106,000 diamond ring, is marked up more than 14 percent over the wholesale price. By contrast, low-priced Wal-Mart uses an average 33 percent markup. “This is not a tricky business. We just try to sell high-quality merchandise at a cost lower than everybody else,” says Costco’s CEO Jim Sinegal who, to keep overhead costs low, still answers his own phone and eats lunch at the same desk he had when he started the company two decades ago.66 Differentiation means making your product or service sufficiently different from competitors’ offerings so that customers are willing to pay a premium price for the extra value or performance that it provides. Differentiation protects companies from industry forces by reducing the threat of substitute products. It also protects companies by making it easier to retain customers and more difficult for new entrants trying to attract new customers. For example, why would anyone pay $2,300 for Whirlpool’s deluxe, upright washer-dryer combination, called the “Duet,” when they could purchase a regular washerdryer combination for $700 or less? The answer is that the Duet washer does huge loads, almost twice what normal washers hold, with just 16 gallons of water, compared to 40 gallons for conventional washers. So it’s incredibly efficient in terms of water and energy. But most importantly, the Duet saves time. Whirlpool brand manager Ali Evans says, “By doing larger loads, women can do fewer loads, and the chore of doing laundry is minimized tremendously. It’s giving them back some freedom and time.”67 And, according to Evans, customers love the Duet. She says,“We’ve been surprised by the passion women have when they talk about it. They call it their ‘buddy’ or their ‘baby.’ They invite people over to see it and use it. People say it’s changing their lives.”68 With a focus strategy, a company uses either cost leadership or differentiation to produce a specialized product or service for a limited, specially targeted group of customers in a particular geographic region or market segment. Focus strategies typically work in market niches that competitors have overlooked or have difficulty serving. With 28 stores nationwide, the Container Store sells products to reorganize and rebuild your closets, sort out your kitchen drawers and cabinets, or add shelves, hooks, and storage anywhere in your home, office, or dorm room. But, unlike Wal-Mart or Target, that’s all it does. President Kip Tindell says, “The fact is, we don’t sell Bounty paper towels or Coca-Cola Classic. We sell complicated stuff like those Elfa storage systems [for closets, garages, etc.] . . . . But selling stuff that’s hard to sell is a key business strategy for us. It ends up giving us incredible differentiation from other retailers, because they just can’t seem to sell the hard stuff. That’s why we give our first-year employees 235 hours of training, as opposed to the industry average of 7 hours.”69
Differentiation has paid off for Whirlpool's Duet brand, which is tremendously popular despite costing over three times what a regular washer-dryer combination costs. The capacity for huge loads saves time, and the high-efficiency front-load design saves water, two extremely compelling selling points.
differentiation The positioning strategy of providing a product or service that is sufficiently different from competitors’ offerings that customers are willing to pay a premium price for it.
focus strategy The positioning strategy of using cost leadership or differentiation to produce a specialized product or service for a limited, specially targeted group of customers in a particular geographic region or market segment.
4.3 Adaptive Strategies Adaptive strategies are another set of industry-level strategies. Whereas the aim of positioning strategies is to minimize the effects of industry competition and build a sustainable competitive advantage, the purpose of adaptive strategies is to choose an industry-level strategy that is best suited to changes in the organization’s external environment. There are four kinds of adaptive strategies: defenders, prospectors, analyzers, and reactors.70 Defenders seek moderate, steady growth by offering a limited range of products and services to a well-defined set of customers. In other words, defenders
defenders An adaptive strategy aimed at defending strategic positions by seeking moderate, steady growth and by offering a limited range of high-quality products and services to a welldefined set of customers.
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prospectors An adaptive strategy that seeks fast growth by searching for new market opportunities, encouraging risk taking, and being the first to bring innovative new products to market.
analyzers An adaptive strategy that seeks to minimize risk and maximize profits by following or imitating the proven successes of prospectors.
reactors An adaptive strategy of not following a consistent strategy, but instead reacting to changes in the external environment after they occur.
aggressively “defend” their current strategic position by doing the best job they can to hold on to customers in a particular market segment. At Manoj Patel’s small grocery in India, laundry detergent sales soared when Procter & Gamble drastically cut prices. Patel said, “It’s so inexpensive now, my customers are buying more.” Market leader Hindustan Lever responded by matching P&G’s detergent price cuts and by cutting its shampoo prices, too. It also introduced a detergent that needs only half as much water to clean clothes, a considerable advantage since most Indians don’t have running water. M.S. Banga, the company’s chairman, says, “We have a very strong position that was built up over years. We are determined not just to defend it, but to strengthen our market share.”71 Despite P&G’s price cuts, the strategy is working: Hindustan Lever’s market share has increased from 27.8 to 29.5 percent in laundry detergent, and from 48.9 to 52.5 percent in shampoo.72 Prospectors seek fast growth by searching for new market opportunities, encouraging risk taking, and being the first to bring innovative new products to market. Prospectors are analogous to gold miners who “prospect” for gold nuggets (i.e., new products) in hopes that the nuggets will lead them to a rich deposit of gold (i.e., fast growth). 3M has long been known for its innovative products, particularly in adhesives. Since 1904, it has invented sandpaper; masking, cellophane, electrical, and scotch tapes; the first commercially available audio and video tapes; and its most famous invention, Post-It notes. Lately, 3M has invented a film that increases the brightness of LCD displays on laptop computers; developed a digital system that enables construction companies to detect underground telecommunication, gas, water, sewer, or electrical lines without digging; and created a pheromone spray that, by preventing harmful insects from mating, will protect apple, walnut, tomato, cranberry, and grape crops. For more on 3M’s innovative products, see the 3M innovation archive (www.3m.com/us/about3M/innovation/archive.jhtml).73 Analyzers are a blend of the defender and prospector strategies. Analyzers seek moderate, steady growth and limited opportunities for fast growth. Analyzers are rarely first to market with new products or services. Instead, they try to simultaneously minimize risk and maximize profits by following or imitating the proven successes of prospectors. India-based Ranbaxy Laboratories follows an analyzer strategy by making low-priced generic copies of already popular patented drugs, such as GlaxoSmithKline’s antibiotic Ceftin and Eli Lilly & Co.’s Ceclor. And, with $80 billion of patented drugs losing their patent protection in the next four years, Ranbaxy plans to file applications with the U.S. Food and Drug Administration to make 20 more generic drugs.74 Says Brian Tempest, president of Ranbaxy’s pharmaceuticals division, “Our [drug] pipeline is getting stronger.”75 Since Ranbaxy spends very little on research and marketing, and its costs in India are one-fifth those of U.S. pharmaceutical firms, its profit margins are 16 percent, very close to the 20 percent margins of companies like Eli Lilly that research and develop new drugs. Finally, unlike defenders, prospectors, or analyzers, reactors do not follow a consistent strategy. Rather than anticipating and preparing for external opportunities and threats, reactors tend to “react” to changes in their external environment after they occur. Not surprisingly, reactors tend to be poorer performers than defenders, prospectors, or analyzers. Fiat, the Italian automaker, the largest automaker in Europe just 15 years ago, has followed a reactor strategy with predictably bad results.76 Protected from competition by quotas that kept high-quality foreign cars out of Italy until 10 years ago, and repeatedly bailed out of financial crises by Italian banks and the Italian government, it underinvested in research and design and didn’t begin serious efforts to improve quality or bring out new models until quotas had expired and Japanese and German companies had exported dozens of stylish, higher-quality cars to Italy.
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As a result of this reactive strategy, Fiat’s share of the Italian market has dropped from 44 percent to 32 percent. Fiat, which has lost $2.27 billion over the last two years, is $8 billion in debt.77 Auto analyst Stephen Cheetham gives company management “only a 50–50 chance” of turning the company around.78
Review 4: Industry-Level Strategies Industry-level strategies focus on how companies choose to compete in their industry. Five industry forces determine an industry’s overall attractiveness to corporate investors and its potential for long-term profitability. Together, a high level of new entrants, substitute products or services, bargaining power of suppliers, bargaining power of buyers, and rivalry between competitors combine to increase competition and decrease profits. Three positioning strategies can help companies protect themselves from the negative effects of industry-wide competition. Under a cost leadership strategy, firms try to keep production costs low so that they can sell products at prices lower than competitors’. Differentiation is a strategy aimed at making a product or service sufficiently different from competitors’ that it can command a premium price. Using a focus strategy, firms seek to produce a specialized product or service for a limited, specially targeted group of customers. The four adaptive strategies help companies adapt to changes in the external environment. Defenders want to “defend” their current strategic positions. Prospectors look for new market opportunities by bringing innovative new products to market. Analyzers minimize risk by following the proven successes of prospectors. Reactors do not follow a consistent strategy, but instead react to changes in their external environment after they occur. 5
FIRM-LEVEL STRATEGIES
Sony brings out its PlayStation2 video game console; Microsoft counters with its Xbox. SprintPCS drops prices and increases monthly cell phone minutes; Verizon strikes back with better reception and even lower prices and more minutes. FedEx, the overnight delivery company, buys Kinko’s copying and printing stores and turns them into FedEx Kinko’s Office & Print Centers to provide a convenient place for businesspeople to drop off and pick up packages; UPS buys Mail Boxes, Etc. and turns its outlets into UPS Stores for exactly the same purpose. Starbucks Coffee opens a store, and nearby locally run coffeehouses respond by improving service, increasing portions, and holding the line on prices. Attack and respond, respond and attack. Firm-level strategy addresses the question “How should we compete against a particular firm?” Let’s find out more about the firm-level strategies (i.e., direct competition between companies) shown in Exhibit 6.13 by reading about 5.1 the basics of direct competition, 5.2 the strategic moves involved in direct competition between companies, and 5.3 entrepreneurship and intrapreneurship.
firm-level strategy A corporate strategy that addresses the question “How should we compete against a particular firm?”
5.1 Direct Competition Although Porter’s five industry forces indicate the overall level of competition in an industry, most companies do not compete directly with all the firms in their industry. For example, McDonald’s and Red Lobster are both in the restaurant business, but no one would characterize them as competitors. McDonald’s offers low-cost, convenient fast food in a “seat yourself” restaurant, while Red Lobster offers mid-priced, sit-down seafood dinners complete with servers and a bar. Instead of “competing” with the industry, most firms compete directly with just a few companies. Direct competition is the rivalry between two companies
direct competition The rivalry between two companies that offer similar products and services, acknowledge each other as rivals, and act and react to each other’s strategic actions.
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offering similar products and services that acknowledge each other as rivals and take offensive Market commonality and defensive positions as they act and react to Resource similarity each other’s strategic actions.79 Two factors determine the extent to which firms will be in direct competition with each other: market commonality and resource similarity. Market commonality is the degree to which two companies have overlapping products, services, or customers in multiple Attack markets. The more markets in which there is product, service, or customer overlap, the more intense the direct competition between the two companies. Resource similarity is the extent to Response which a competitor has similar amounts and Firm A Firm B kinds of resources, that is, similar assets, capabilities, processes, information, and knowledge used Entering market is most forceful attack. to create and sustain an advantage over competiExiting market is clear defensive signal of retreat. tors. From a competitive standpoint, resource Entrepreneurship is strategy of entering established markets similarity means that your direct competitors can or developing new markets. probably match the strategic actions that your company takes. Exhibit 6.14 shows how market commonality and resource similarity interExhibit 6.13 Firm-Level Strategies (Direct act to determine when and where companies are in direct competition.80 The Competition) overlapping area in each quadrant (between the triangle and the rectangle, or between the differently colored rectangles) depicts market commonality. The market commonality larger the overlap, the greater the market commonality. Shapes depict resource similarity, with rectangles representing one set of competitive resources and The degree to which two companies have overlapping products, services, triangles representing another. Quadrant I shows two companies in direct or customers in multiple markets. competition because they have similar resources at their disposal and a high degree of market commonality. These companies try to sell similar products and services to similar customers. McDonald’s and Burger King would clearly fit here as direct competitors. In Quadrant II, the overlapping parts of the triangle and rectangle show two companies going after similar customers with some similar products or services, but doing so with different competitive resources. McDonald’s and Wendy’s restaurants would fit here. Wendy’s is after the same lunchtime and dinner crowds that McDonald’s is. Nevertheless, with its more expensive hamburgers, resource similarity fries, shakes, and salads, Wendy’s is less of a direct competitor to McDonald’s The extent to which a competitor has than Burger King is. For example, Wendy’s Garden Sensation salads (using fancy similar amounts and kinds of lettuce varieties, grape tomatoes, and mandarin oranges) bring in customers who resources. would have eaten at more expensive casual dining restaurants like Applebee’s.81 A representative from Wendy’s says, “We believe you win customers by consistently offering a better product at a strong, everyday value.”82 In Quadrant III, the very small overlap shows two companies with different competitive resources and little market commonality. McDonald’s and Luby’s cafeteria fit here. Although both are in the fast-food business, there’s almost no overlap in terms of products and customers. For example, Luby’s sells baked chicken, turkey, roasts, meat loaf, and vegetables, none of which are available at McDonald’s. Furthermore, Luby’s customers aren’t likely to eat at McDonald’s. In fact, Luby’s is not really competing with other fast-food restaurants, but with eating at home. Company surveys show that close to half of its customers would have eaten at home, not at another restaurant, if they hadn’t come to Luby’s.83 Finally, in Quadrant IV, the small overlap between the two rectangles shows that McDonald’s and Subway compete with similar resources but with little market commonality. In terms of resources, McDonald’s sales are much larger, but with 22,928 stores worldwide (18,206 in the United States), much faster
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Exhibit 6.14 Market Commonality
A Framework of Direct Competition McDonald's
Wendy's
McDonald's
Burger King
High
McDonald's
II
I
III
IV McDonald's
Low Luby's Cafeteria Low
Subway High
Resource Similarity Source: Republished with permission of Academy of Management, P.O. Box 3020, Briar Cliff, NY, 10510-8020. M. Chen, “Competitor Analysis and Interfirm Rivalry: Toward a Theoretical Integration,” Academy of Management Review 21. Reproduced by permission of the publisher via Copyright Clearance Center, Inc.
growth, and plans to have 30,000 stores worldwide by 2010, Subway will soon approach McDonald’s 31,129 stores worldwide (just 13,000 in the United States).84 Though Subway and McDonald’s compete, they aren’t direct competitors in terms of market commonality in the way that McDonald’s and Burger King are, because Subway, unlike McDonald’s, sells itself as a provider of healthy fast food. Thus, the overlap is much smaller in Quandrant IV than in Quadrant I. With its advertising featuring “Jared,” who lost 245 pounds eating at Subway, the detailed nutritional information available in its stores, and its close relationship with the American Heart Association, Subway’s goal “is to emphasize that the Subway® brand represents all that is good about health and well-being.”85 And while fast-food customers tend to eat at both restaurants, Subway’s customers are twice as loyal as McDonald’s customers, most likely because of Subway’s, healthier food.86
5.2 Strategic Moves of Direct Competition While corporate-level strategies help managers decide what business to be in and industry-level strategies help them determine how to compete within an industry, firm-level strategies help managers determine when, where, and what strategic actions should be taken against a direct competitor. Firms in direct competition can make two basic strategic moves: attacks and responses. An attack is a competitive move designed to reduce a rival’s market share or profits. For example, hoping to increase its market share at Burger King’s expense, McDonald’s began a brutal price war by putting eight items on a new $1 value menu, including two sandwiches, the Big’n Tasty quarter pounder and the McChicken sandwich, that usually sold for $1.99.87 Sales of those sandwiches doubled within weeks. The attack worked very well at first, as Robert Doughty, a Burger King spokesperson complained, “They’ve created a senseless price war. That has put a lot of competitive pressure on us and others, too.”88 By contrast, a response is a countermove, prompted by a rival’s attack, that is designed to defend or improve a company’s market share or profit. There are two kinds of responses.89 The first is to match or mirror your competitor’s move. This is what Burger King did to McDonald’s by selling 11 menu items for 99 cents, including its popular double cheeseburgers. The second kind of response, however, is to respond along a different dimension from your
attack A competitive move designed to reduce a rival’s market share or profits.
response A competitive countermove, prompted by a rival’s attack, to defend or improve a company’s market share or profit.
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competitor’s move or attack. For example, instead of cutting prices, Burger King could have introduced a new menu item to attract customers away from McDonald’s. Market commonality and resource similarity determine the likelihood of an attack or response, that is, whether a company is likely to attack a direct competitor or to strike back with a strong response when attacked. When market commonality is strong and companies have overlapping products, services, or customers in multiple markets, there is less motivation to attack and more motivation to respond to an attack. The reason for this is straightforward: when firms are direct competitors in a large number of markets, they have a great deal at stake. So, when McDonald’s launched an aggressive price war with its value menu, Burger King had no choice but to respond by cutting its own prices. Whereas market commonality affects the likelihood of an attack or a response to an attack, resource similarity largely affects response capability, that is, how quickly and forcefully a company can respond to an attack. When resource similarity is strong, the responding firm will generally be able to match the strategic moves of the attacking firm. Consequently, a firm is less likely to attack firms with similar levels of resources because it is unlikely to gain any sustained advantage when the responding firms strike back. On the other hand, if one firm is substantially stronger than another (i.e., low resource similarity), then a competitive attack is more likely to produce sustained competitive advantage. With over 30,000 stores to Burger King’s 11,000 stores and much more in the way of financial resources, McDonald’s launched a price war hoping to inflict serious financial damage on Burger King while suffering minimal financial damage to itself. This strategy worked to some extent. Although Burger King sold 11 menu items for 99 cents, it wasn’t willing or able to cut the price of its best-selling Whopper sandwiches to 99 cents (from $1.99). Basically admitting that it couldn’t afford to match McDonald’s price cuts on more expensive sandwiches, a Burger King spokesperson insisted, “McDonald’s can’t sell those sandwiches at $1 without losing money. It isn’t sustainable.” Thanks to its much larger financial resources, McDonald’s had the funds to outlast Burger King in the price war. As often happens, though, the price war ended up hurting both companies’ profits.90 McDonald’s ended the price war when it became clear that lower prices didn’t draw more customers to its restaurants. In general, the more moves (i.e., attacks) a company initiates against direct competitors, and the greater a firm’s tendency to respond when attacked, the better its performance. More specifically, attackers and early responders (companies that are quick to launch a retaliatory attack) tend to gain market share and profits at the expense of late responders. This is not to suggest that a “full-attack” strategy always works best. In fact, attacks can provoke harsh retaliatory responses. When Kimberly-Clark cut the price of Huggies diapers below $10 a box (by reducing the number of diapers), Procter & Gamble, maker of Pampers diapers, retaliated by cutting prices 15 percent and printing “Compare” on Pampers boxes to point out that it had not reduced the number of diapers, as well as the price. In the end, Kimberly-Clark had to undo its price cut and increase the number of diapers per box. The price war was so damaging that profits declined, leading to a 12 percent drop in Kimberly-Clark’s stock price.91 Consequently, when deciding when, where, and what strategic actions to take against a direct competitor, managers should always consider the possibility of retaliation.
5.3 Entrepreneurship and Intrapreneurship: Entering New Markets As the McDonald’s–Burger King and Huggies-Pampers examples illustrate, attacks and responses can include smaller, more tactical moves, like price cuts, specially advertised sales or promotions, or improvements in service. On a
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GETTY IMAGES
larger scale, they can also involve resource-intensive strategic moves, such as expanding service and production facilities, introducing new products or services within the firm’s existing business, or entering a completely new line of business for the first time. Of these, market entries and market exits are probably the most important kinds of attacks and responses. Entering a market is perhaps the most forceful attack or response because it sends the clear signal that the company is committed to gaining or defending market share and profits at a direct competitor’s expense. By contrast, exiting a market is an equally clear defensive signal that your company is retreating.92 Since entrepreneurship is the process of entering new or established markets with new goods or services, entrepreneurship is also a firm-level strategy. In fact, the basic strategic act of entrepreneurship is new entry—creating a new business from a brand new startup firm. For example, Scott Griffith created a new rental car company called Zipcar to compete with such established companies as Enterprise, Hertz, and Avis. Zipcar is able to do this by offering more and doing it cheaply. After reserving a Zipcar (by the hour, day, etc.) online or via a toll-free phone number, Zipcar members simply go to a Zipcar location and place their membership card on their chosen rental car’s windshield. A wireless access system then unlocks the car—but only during the time it is reserved. That way, no one else can use the car during that time. When finished, the rentor simply returns the car to its original location. Gas and insurance are included in the price (about $60 a day, or $8.50 to $12 an hour), so the car doesn’t have to be filled up before it is returned. And all of this is done without filling out forms, dealing with people at a rental counter, and having the paperwork and car inspected by security personnel before leaving the rental car lot.93 Established firms can be entrepreneurial, too, by entering new or established markets with new goods or services. When existing companies are entrepreneurial, it’s called intrapreneurship.94 Think “coffee,” and chances are you’ll end up at a Dunkin’ Donuts, which sells more regular coffee than anybody else. Think “latte,” and you’ll end up at Starbucks Coffee instead. Dunkin’ Donuts, however, is branching out from its regular coffee and donuts and entering a new market. It wants to sell you a tall, medium, or large Latte for 25 percent less than Starbucks. Rather than hire and train new staff to be coffee baristas, Dunkin’ Donuts had a Swiss company produce an $8,000 automated, “idiot-proof” machine that consistently makes good cappuccinos and lattes in less than 60 seconds. Boston lawyer Kathleen Brown who has switched from Starbucks to Dunkin’ Donuts says, “I can order a plain medium caramel latte and not deal with all that fancy stuff.”95 Customer Leslie Bello agrees, “Both are good, but Starbucks takes too long.”96 With sales surging, Dunkin’ Donuts plans to triple its stores to 15,000 over the next decade. As an executive at Dunkin’ Donuts points out, “Espresso has become mainstream in America. And who does mainstream better than Dunkin’ Donuts?” Accordingly, Dunkin’ Donuts advertising proclaims, “Latte for Every Tom, Dick, and Lucciano.”97 Whereas the goal of an intrapreneurial strategy is new entry, the process of carrying out an intrapreneurial strategy depends on the ability of the company’s founders or existing managers to foster an entrepreneurial orientation (remember, intrapreneurship is entrepreneurship in an existing organization).
Using entrepreneurial strategies, Zipcar entered an established market with a competitive product. Shown here is a member holding her membership card that acts as an electronic car key.
entrepreneurship The process of entering new or established markets with new goods or services.
intrapreneurship Entrepreneurship within an existing organization.
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entrepreneurial orientation The set of processes, practices, and decision-making activities that lead to new entry, characterized by five dimensions: risk taking, autonomy, innovativeness, proactiveness, and competitive aggressiveness.
An entrepreneurial orientation is the set of processes, practices, and decisionmaking activities that lead to new entry. Five key dimensions characterize an entrepreneurial orientation:98 •
•
• •
•
Risk taking. Entrepreneurial firms are willing to take some risks by making large resource commitments that may result in costly failure. Another way to conceptualize risk taking is to think of it as a managerial preference for bold rather than cautious acts. Autonomy. If a firm wants to successfully develop new products or services to enter new markets, it must foster creativity among employees. To be creative, employees need the freedom and control to develop a new idea into a new product or service opportunity without interference from others. In other words, they need autonomy. Innovativeness. Entrepreneurial firms also foster innovativeness by supporting new ideas, experimentation, and creative processes that might produce new products, services, or technological processes. Proactiveness. Entrepreneurial firms have the ability to anticipate future problems, needs, or changes by developing new products or services that may not be related to their current business, by introducing new products or services before the competition does, and by dropping products or services that are declining (and likely to be replaced by new products or services).99 Competitive aggressiveness. Because new entrants are more likely to fail than are existing firms, they must be aggressive if they want to succeed. A new firm often must be willing to use unconventional methods to directly challenge competitors for their customers and market share.
Without these, an entrepreneurial orientation is unlikely to be created, and an intrapreneurial strategy is unlikely to succeed.
Review 5: Firm-Level Strategies Firm-level strategies are concerned with direct competition between firms. Market commonality and resource similarity determine whether firms are in direct competition and thus likely to attack each other or respond to each other’s attacks. In general, the more markets in which there is product, service, or customer overlap, and the greater the resource similarity between two firms, the more intense the direct competition between them. When firms are direct competitors in a large number of markets, attacks are less likely because responding firms are highly motivated to quickly and forcefully defend their profits and market share. By contrast, resource similarity affects response capability, meaning how quickly and forcefully a company responds to an attack. When resource similarity is strong, attacks are much less likely to produce a sustained advantage because the responding firm is capable of striking back with equal force. Market entries and exits are the most important kinds of attacks and responses. Entering a new market is a clear offensive signal, while exiting a market is a clear signal that a company is retreating. Market entry is perhaps the most forceful attack or response because it sends the clear signal that the company is committed to gaining or defending market share and profits at a direct competitor’s expense. In general, attackers and early responders gain market share and profits at the expense of late responders. Attacks must be carefully planned and carried out, however, because they can provoke harsh retaliatory responses. Finally, the basic strategic act of entrepreneurship is new entry. To carry out an entrepreneurial strategy, a company must create an entrepreneurial orientation by encouraging risk taking, autonomy, innovativeness, proactiveness, and competitive aggressiveness.
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Key Terms acquisition, 181 analyzers, 190 attack, 193 bargaining power of buyers, 188 bargaining power of suppliers, 188 BCG matrix, 181 cash cow, 182 character of the rivalry, 187 competitive advantage, 168 competitive inertia, 172 core capabilities, 174 core firms, 175 corporate-level strategy, 180 cost leadership, 188 defenders, 189 differentiation, 189 direct competition, 191 distinctive competence, 174 diversification, 180 dog, 182
entrepreneurial orientation, 196 entrepreneurship, 195 firm-level strategy, 191 focus strategy, 189 grand strategy, 184 growth strategy, 185 imperfectly imitable resource, 169 industry-level strategy, 186 intrapreneurship, 195 market commonality, 192 nonsubstitutable resources, 170 portfolio strategy, 181 prospectors, 190 question mark, 182 rare resources, 169 reactors, 190 recovery, 185 related diversification, 184 resource similarity, 192 resources, 168
response, 193 retrenchment strategy, 185 secondary firms, 176 shadow-strategy task force, 177 situational (SWOT) analysis, 173 stability strategy, 185 star, 182 strategic dissonance, 173 strategic group, 175 strategic reference points, 177 sustainable competitive advantage, 169
threat of new entrants, 187 threat of substitute products or services, 187 transient firms, 176 unrelated diversification, 181 valuable resources, 169
Concept Check 1. Identify the components of a sustainable competitive advantage. 2. Outline the steps in the strategy-making process. 3. What is a corporate-level strategy? Describe the major approaches to corporate-level strategy. 4. What are the elements of the BCG matrix? 5. Identify three grand strategies and give examples of each.
6. What is an industry-level strategy? What tools can companies use to develop successful industry-level strategies? 7. What are Porter’s five industry forces, and how do they affect a company’s strategy? 8. What is a firm-level strategy? 9. What are the basic elements of direct competition? 10. How do companies implement entrepreneurship as an internal strategy?
Self-Assessment STRATEGY QUESTIONNAIRE Generally speaking, a strategy is a plan of action that is designed to help you achieve a goal. Strategies are not limited to grand plans that help you accomplish grand goals. You probably use strategies every day in simple ways. For example, think of a route you regularly drive. Do you know how fast (or slow) you need to go to catch all the lights on green? Or where to swerve to avoid a pothole? Or even when to take a side street to shave
a few minutes off your commute? Speeding up for one block in order to catch the green lights at the next five intersections is a strategy. Strategy, then, involves thinking about how you are going to accomplish what you set out (i.e., have planned) to do. On page 617 of the Self-Assessment Appendix, you will find a survey that will provide some baseline information you can use as you develop your strategic managerial skills.
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Management Decision CHEW ON THIS When William Wrigley, Jr., took over the publicly traded, family-controlled business in 1999, the world’s leading gum maker hadn’t had a single unprofitable quarter or missed a dividend since 1923.100 The company was debt-free and dominated the industry with an estimated 50 percent market share. The maker of Juicy Fruit and Doublemint was a sleeping giant— reliable financial performance, reliable products, fairly stable market—but a growth company it was not. Wrigley’s first nongum product didn’t debut until 2002. Even though Wrigley sells gum around the world, Bill Jr. wants to transform Wrigley into a much larger company with a much broader reach. In fact, he wants to double the size of the company over a number of years. This could be difficult. People who chew gum are tending toward sugar-free gums. Wrigley’s hallmark brands—Juicy Fruit, Doublemint, and Spearmint—are not sugar-free. Sugarless gum now accounts for 60 percent of U.S. gum sales, and sales of sugarless gum consistently grow at the expense of regular gum. Competition from the number two gum maker, Adams, maker of Trident and Dentyne, will only become stiffer since Cadbury Schweppes has purchased it and opened
up better distribution for Adams in Latin America (where Wrigley is weak) and Europe (where Wrigley is stronger). In addition, breath mints have gained significant ground against chewing gum. The popularity of high-intensity breath mints like Altoids among teenagers (Wrigley’s main customers) has driven gum sales down 30 percent. Bill Jr.’s aggressive attitude toward growth is no secret. He has considered buying Hershey Foods (for around $12.5 billion), various assets of Mars Candy not up for sale, and even Tootsie Roll (valued at around $423 million), also not for sale. He has also considered joint ventures with companies like Procter & Gamble to develop medicinal chewing gum. Questions 1. Which avenue of growth seems more promising for Wrigley—growing externally through acquisition or merger or growing internally through product development and innovation? 2. Can Wrigley create a sustainable competitive advantage without a growth strategy? Do you think a sustainable competitive advantage is possible in the chewing gum industry? Explain.
Management Team Decision OF PARAMOUNT IMPORTANCE The deal was hush-hush, which meant that everyone in Hollywood knew about it. So, rather than being able to slowly, deliberately transition into your new position as head of Viacom’s Paramount Motion Pictures, you’re going to need to make a splash. As the titled partner in the agency that represented such talent as Jennifer Aniston, Brad Pitt, Nicolas Cage, and Lorne Michaels, you have a unique perspective on movie studios, which makes you keenly aware that you’ve inherited a company that’s facing more challenges than its competitors. For much of the last decade, Paramount was tightfisted and only modestly profitable. Top managers limited expenses to what they considered operationally necessary, which meant capping budgets at under $100 million per movie and spending no resources on acquisitions. Paramount’s profits in 2004 amounted to $276 million, an increase of only 5 percent over 2001’s profits of $263 million. In that regard, the competition is
eating Paramount’s lunch. Over the same three-year period, profits at Time Warner’s film unit rose 14 percent to $1.4 billion, and Disney’s profits increased by a stunning 155 percent, from $260 million to $662 million! Those figures confirm the axiom that you have to spend money to make money. The former president of Viacom was known for extreme fiscal restraint, preferring to split production costs with other moviemakers for big films. In contrast, Disney used its resources to purchase smaller studios, like Miramax and Touchstone, and expand its product offerings. Paramount was once known for mega-hits like Titanic, Forest Gump, and The First Wives’ Club, but its recent successes have been more modest like The Italian Job and The SpongeBob SquarePants Movie, which were trounced at the box office by its competitors’ powerhouse franchises (Lord of the Rings, Shrek, Spiderman, and Harry Potter), not to mention successful independent films (Passion of the Christ).
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Compounding Paramount’s difficulties is the fact that the entertainment industry seems to be undergoing potentially massive change. At Disney alone, the CEO has changed, the head of Miramax is leaving, and Steve Jobs and his Pixar studios are shopping for a distributor other than the House of Mouse. And the big studios of bygone days are now just cogs in large multimedia conglomerates. Sony just bought MGM, and Lions Gate and Artisan have merged. Warner Brothers is part of Time Warner, and your own Paramount is just one of many businesses operated by Viacom. One result of these changes is a reduced number of DVD producers. As DVDs play a larger role in studio revenue sreams, Paramount may be hamstrung by is skimpy library of 1,200 titles. Time Warner boasts a library of 6,600 titles, and Disney enjoys an extraordinary library of classics. Since you are an outsider with no studio management experrience, you think it best to work closely with your management team to craft a strategy for Paramount Picures. The landsccape has indeed changed since the studio’s heyday in the 1990s, and your knowledge of the entertainment industry from a talent management perspective may help the company
drastically improve results, if not pull ahead of the competition.101 For this exercise, assemble three to four students to play the role of the executive team at Paramount Picures. Before beginning the exercise, you might want to do some preliminary research to familiarize yourself with Paramount’s roster of films. Also identify other studios (either those mentoned in the case or others that you know of) and check out their rosters. Questions 1. After reading the case, you might say that Paramount Pictures obviously needs strategic change, but does it really? 2. Discuss the entertainment industry according to Porter’s five industry forces. 3. Using what you know from the chapter, identify a corporate-, industry-, and firm-level strategy that closely matches Paramount Pictures’ current strategy. 4. Based on your work in questions 1 to 3, do you change Paramount Pictures’ strategy, or do you stick with the existing strategy? If you decide to change it, what changes would you make?
Develop Your Career Potential AN INDIVIDUAL SWOT ANALYSIS In order to maintain and sustain a competitive advantage, companies continue to analyze their overall strategy in light of their current situation.102 In doing so, they often use a SWOT analysis, which focuses on the strengths and weaknesses in the firm’s internal environment and the opportunities and threats present in the firm’s external environment. One way to gain experience in conducting a SWOT analysis is to perform one on yourself—in other words, conduct a personal SWOT analysis. Assume you have just completed your college education and are ready to apply for a job as a manager of a small to medium-sized facility. Perform a personal SWOT analysis to determine if your current situation matches your overall strategy. Identifying your strengths will probably be the easiest step in the analysis. They will most likely be the skills, abilities, experience, and knowledge that help differentiate you from your competitors. Take care to be realistic and honest in analyzing your strengths and weaknesses. One way of identifying both strengths and weaknesses is to look at previous job evaluation comments and talk to former and present employers and coworkers. Their comments will typically focus on objective
strengths and weaknesses that you exhibit or exhibited while on the job. You may also gather information about your strengths and weaknesses by analyzing your personal interests and learning more about your personality type. Most college placement offices have software to help students identify their interests and personality types and then match that information to certain career paths. This type of assessment can help ensure that you do not choose a career path that is incongruent with your personality and interests. Probably the hardest portion of the personal SWOT analysis will be the identification of your weaknesses. As humans, we are often reluctant to focus on our deficiencies; nonetheless, being aware of potential weaknesses can help us reduce them or improve upon them. Since you are preparing for a career in management, you should research what skills, abilities, knowledge, and experience are needed to be a successful manager. Comparing your personal strengths to those needed as a manager can help you identify potential weaknesses. Once you identify weaknesses, develop a plan to overcome them. Remember that most annual evaluations will include both strengths and weaknesses, so don’t forget to include this valuable piece of information in your analysis.
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You can identify opportunities by looking at employment possibilities for entry-level managers at this particular point in time. In this part of the analysis, it helps to match your personal strengths with opportunities. For example, if you have experience in manufacturing, you may initially choose to apply only to manufacturing-type businesses. The last step of the analysis involves identifying potential threats. Threats are barriers that can prevent you from obtaining your goals. Threats may include events such as an economic recession that reduces the number of job openings for entry-level managers. By knowing what the barriers are and by assembling proactive plans to help deal with them, you can reduce the possibility of your strategy becoming ineffective.
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Focusing on a personal SWOT analysis can be a practical way to prepare for an actual company analysis, and it also allows you to learn more about yourself and your long-term plans. Questions 1. In light of the SWOT analysis, what plans might you propose for yourself that will help you maximize your strengths, exploit your opportunities, and minimize your weaknesses and threats? Write three S.M.A.R.T. goals (remember Chapter 5) that will help you implement your plans. 2. How might this assignment prepare you for both your academic and your professional career?
Take Two
Biz Flix Seabiscuit
Seabiscuit is a 2003 American drama film based on the best-selling book Seabiscuit: An American Legend by Laura Hillenbrand. The film stars Tobey Maguire as Red Pollard, the jockey for Seabiscuit, an undersized and overlooked thoroughbred race horse whose unexpected successes made him a popular sensation in the United States near the end of the Great Depression. In this scene, a hospitalized Pollard is unable to ride during the final leg of the Triple Crown, so he tries to communicate to his friend and replacement jockey Charley Kurtsinger (played by Chris McCarron) what he needs to do to win the race. What to Watch for and Ask Yourself
1. What aspects of strategic planning can you identify in the clip? 2. Which strategic alternative (risk seeking or risk avoiding) does Red Pollard advocate that his friend use during the race? Explain.
Management Workplace Texas Jet
Even the most enthusiastic, determined managers encounter strategic difficulties when environments change and their businesses expand, contract, or are stuck in the status quo. Reed Pigman, owner of Texas Jet, was already experiencing crippling debt and stagnating sales in a commodity market when the competitive environment changed, pushing him to the brink of going out of business. By stepping back to rethink his strategy, he was able to save his company and turn it into a prosperous enterprise in a difficult industry. What to Watch for and Ask Yourself
1. Describe Reed Pigman’s use of strategic reference points. 2. Explain how moving from a firm-level strategy to an industry-level strategy helped Texas Jet to achieve a competitive advantage. 3. Do you think Texas Jet’s competitive advantage is sustainable? Explain.
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C H A P T E R
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7 Chapter What Would You Do? Organizational Innovation 1. Why Innovation Matters 1.1 Technology Cycles 1.2 Innovation Streams
2. Managing Innovation 2.1 Managing Sources of Innovation 2.2 Experiential Approach: Managing Innovation during Discontinuous Change 2.3 Compression Approach: Managing Innovation during Incremental Change
Organizational Change 3. Organizational Decline: The Risk of Not Changing
4. Managing Change 4.1 Managing Resistance to Change 4.2 What Not to Do When Leading Change 4.3 Change Tools and Techniques
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise
Xtra! Ten exhibit worksheets, author FAQs, quiz, Management News, and video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
W.L. Gore Headquarters, Newark, Delaware.1 Bill Gore started the W.L. Gore Company in his basement when he left DuPont to develop innovative uses for Teflon (polytetrafluoroethylene or PTFE), the then new nonstick plastic. The company’s first products were wires and cables insulated in PTFE. Later, however, Gore discovered that stretching PTFE under the right conditions creates a plastic that does not absorb water and is incredibly strong, chemically inert, resistant to cold, heat, chemicals and flames, and low in friction. Today, W.L. Gore is best known for Gore-Tex, a waterproof, windproof, and temperature-resistant fabric that “breathes” and does not trap perspiration and body heat. Marketed as “Guaranteed to Keep You Dry,” Gore-Tex is used not only for coats, gloves, and camping and hiking gear but also for protective outerwear worn by firefighters and military, emergency, and medical personnel. Of course, developing Gore-Tex took years. Early versions leaked at the seams (for example, where the sleeves were attached) and dissolved on contact with suntan lotions and bug spray. Gore’s Stephen Shuster admits, “There were huge challenges.” During the early stages, Shuster even wore Gore-Tex products into the shower to determine why the seams leaked. Today, Gore is still committed to quality: it hires University of Delaware students to wear Gore-Tex products in specially designed rain closets or while walking on a treadmill in a room cooled to freezing temperatures. For two decades, Gore-Tex was a unique product. Today, however, a number of alternative fabrics, such as “Entrant GII” and “eVENT,” have many of the same characteristics but cost only $6 to $8 per yard compared to $15 to $30 for GoreTex. In fact, Entrant works so well that it, and not Gore-Tex, is the official garment of the U.S. and Canadian ski teams. Not only is Gore-Tex more expensive, but customers who use Gore-Tex in their products think Gore’s strict manufacturing requirements are overly restrictive. For example, as part of its quality control, Gore requires manufacturers that use Gore-Tex to submit their products for quality testing. Darcy Lee, who makes snowboarding clothing, says, “You’re going
What Would You Do?
to critique whether my garment is good enough? I thought that was really arrogant.” As a result of these factors, sales of Gore-Tex have dropped. But with Gore-Tex accounting for 21 percent of W.L. Gore’s $1.6 billion in revenues, the company has to find ways of offsetting Gore-Tex’s declining revenues. Historically, Gore has increased revenues by developing innovative products. But how do you run a company so that it consistently (not just once or twice) develops innovative, marketleading products? Certainly, you can’t manage the same way you would with a company that produces the same product over and over again. Founder Bill Gore has always said that companies operate best during a crisis because they throw out the old rules and act quickly to solve it. So, he reasons, why wait for a crisis? Based on his logic, what typical rules, policies, or structures should Gore break or throw out to encourage creativity and innovation? And, by the way, Gore is not interested in incremental innovation that makes products just a little better. The focus has always been on “unique and valuable” ideas STUDY TIP that lead to “dramatic improveOn a separate sheet, write the ments” in product performance. So, beyond managing titles of the exhibits in this for innovation, how do you chapter. Then, with your book manage innovation to regularly closed, try to reproduce the produce dramatically different diagrams exactly as they are and better products? Finally, in the text. Write a short dewhat role should company leaders play in encouraging scription of what each diainnovation and creativity? Bill gram depicts; then open your Gore left DuPont because its book to check your work. leaders ignored his innovative ideas for using Teflon—the same ideas that have made W.L. Gore a multibillion-dollar company. What role should leaders play in the company, and what role should leadership play in encouraging creativity and innovation? If you were in charge at W.L. Gore, what would you do?
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organizational innovation The successful implementation of creative ideas in organizations.
creativity The production of novel and useful ideas.
organizational change A difference in the form, quality, or condition of an organization over time.
We begin this chapter by reviewing the issues associated with organizational innovation the problem facing W.L. Gore. Organizational innovation, is the successful implementation of creative ideas in an organization.2 Creativity, which is a form of organizational innovation, is the production of novel and useful ideas.3 In the first part of this chapter, you will learn why innovation matters and how to manage innovation to create and sustain a competitive advantage. In the second half of this chapter, you will learn about organizational change. Organizational change is a difference in the form, quality, or condition of an organization over time.4 You will also learn about the risk of not changing and the ways in which companies can manage change.
Organizational Innovation “When you’re done, be sure to turn off the lights and lock the doors. We don’t want anyone breaking into the tent.” The tent? Because of their low cost and interesting architectural features, organizations are increasingly using tents like buildings. A church in Colorado Springs spent $1.6 million to erect a 20,000square-foot tent with tiled bathrooms, a second floor mezzanine, and 32 aluminum arches for its chapel and youth facility. The facility has heavy vinyl walls and ceilings instead of canvas, huge metal frames instead of tent poles, windows and doors that lock instead of zippered openings, central heating and air-conditioning instead of campfires, and wood floors and carpeting instead of hard, uneven ground, leading architect Todd Dalland, who has designed tents for 30 years to ask, “At what point is it a tent? At what point is it a building?”5 Nine years ago, Trump Hotel & Casino Resorts put up a two-story, 80,000-square-foot “hospitality and entertainment center” at its Buffington Harbor riverboat casino in Gary, Indiana. From the inside, viewing its crystal chandeliers, marble walls and floors, elevator, numerous restaurants, and high-tech water display, you wouldn’t know you were in a tent. Organizational innovation, is the successful implementation of creative ideas, like using tents for buildings, in an organization.6
1 2
1
After reading the next two sections on organizational innovation, you should be able to explain why innovation matters to companies. discuss the different methods that managers can use to effectively manage innovation in their organizations.
WHY INNOVATION MATTERS
When was the last time you used a record player to listen to music, tuned up your car, baked cookies from scratch, or manually changed the channel on your TV? Because of product innovations and advances in technology, it’s hard to remember, isn’t it? In fact, since compact discs began replacing vinyl record albums more than a decade ago, many of you may never have played a record album. Lots of people used to tune up their own cars because doing a tune-up was easy, quick, and cheap. Change the points, spark plugs, and distributor cap, and your car was good for another six months or 12,000 miles. Today, with advanced technology and computerized components, tuning up a car is far too complex for most. Hardly anybody makes cookies from scratch anymore, either. Millions of kids think that baking cookies means adding water to a powdered mix or getting premade cookie dough out of the refrigerator. As for manually changing the channels on your TV, you may have done that recently, but only because you couldn’t find the remote.
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We can only guess what changes technological innovations will bring in the next 20 years. Maybe we’ll be listening to compact chips instead of compact discs. (Come to think of it, with iPods, we already do.) Maybe cars won’t need tune-ups. Maybe we’ll use the Internet to have cookies delivered hot to our homes like pizza. And maybe TVs will be voice activated, so it won’t matter if you lose the remote (just don’t lose your voice). Who knows? The only thing we do know about the next 20 years is that innovation will continue to change our lives. For a fuller appreciation of how technological innovation has changed our lives, see Exhibit 7.1 on technological innovations since 1900.
Exhibit 7.1 Technological Innovation since 1900
There’s no better way to understand how technology has repeatedly and deeply changed modern life than to read a decade-bydecade list of innovations since 1900. The first time through the list, simply appreciate the amount of change that has occurred. The second time through, look at each invention and ask yourself two questions: What brand new business or industry was created by this innovation? And what old business or industry was made obsolete by this innovation? 1900–1910 • electric typewriter • air conditioner • airplane • reinforced concrete skyscraper • vacuum tube • plastic • chemotherapy • electric washing machine 1911–1920 • artificial kidney • mammography • 35mm camera • zipper • sonar • tank • Band-Aid • submachine gun 1921–1930 • self-winding watch • TB vaccine • frozen food • commercial fax service • talking movies • black and white television • penicillin • jet engine • supermarket 1931–1940 • defibrillator • radar • Kodachrome film • helicopter • nylon • ballpoint pen • first working computer • fluorescent lighting • color television
1941–1950 • aerosol can • nuclear reactor • atomic bomb • first modern herbicide • microwave oven • bikini • disposable diaper • ENIAC computer • mobile phone • transistor • credit card 1951–1960 • Salk’s polio vaccine • DNA’s structure deciphered • oral contraceptive • solar power • Tylenol • Sputnik • integrated circuit • breast implants 1961–1970 • measles vaccine • navigation satellite • miniskirt • video recorder • soft contact lenses • coronary bypass • handheld calculator • computer mouse • Arpanet (prototype Internet) • bar-code scanner • lunar landing 1971–1980 • compact disc • Pong (first computer game) • word processor • gene splicing • Post-It note • Ethernet (computer network)
• • • • • •
laser printer personal computer VHS video recording fiber optics linked ATMs magnetic resonance imaging
1981–1990 • MS-DOS • space shuttle • clone of IBM personal computer • cell phone network • computer virus • human embryo transfer • CD-ROM • Windows software • 3-D video game • disposable contact lenses • Doppler radar • RU-486 (abortion pill) • global positioning system by satellite • stealth bomber • World Wide Web 1991–2000 • baboon-human liver transplant • taxol (cancer drug) • mapping of the male chromosome • Pentium processor • Channel tunnel opens • HIV protease inhibitor • gene for obesity discovered • Java (computer language) • cloning of an adult mammal 2001–Today • mapping of human genome • first cloning of human embryo • inexpensive global positioning tracking/mapping/guidance systems
Source: T. Gideonse, “Decade by Decade: A Rich Century of Better Mousetraps,” Newsweek Special Issue: The Power of Invention, Winter 1997–1998, 12–15.
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Let’s begin our discussion of innovation by learning about: 1.1 technology cycles, and 1.2 innovation streams.
1.1 Technology Cycles
Performance
In Chapter 3, you learned that technology is the knowledge, tools, and techniques used to transform inputs (raw materials, information, etc.) into outputs technology cycle (products and services). A technology cycle begins with the “birth” of a new A cycle that begins with the “birth” technology and ends when that technology reaches its limits and “dies” as it is of a new technology and ends when replaced by a newer, substantially better technology.7 For example, technology that technology reaches its limits and cycles occurred when air-conditioning supplanted fans, when Henry Ford’s is replaced by a newer, substantially Model T replaced horse-drawn carriages, when planes replaced trains as a better technology. means of cross-country travel, when vaccines that prevented diseases replaced medicines designed to treat them, and when battery-powered wristwatches replaced mechanically powered, stem-wound wristwatches. From Gutenberg’s invention of the printing press in the 1400s to the rapid advance of the Internet, studies of hundreds of technological innovations have S-curve pattern of innovation shown that nearly all technology cycles follow the typical S-curve pattern of A pattern of technological innovation innovation shown in Exhibit 7.2.8 Early in a technology cycle, there is still characterized by slow initial progress, much to learn, so progress is slow, as depicted by point A on the S-curve. The then rapid progress, and then slow flat slope indicates that increased effort (i.e., money, research and developprogress again as a technology ment) brings only small improvements in technological performance. Intel’s matures and reaches its limits. technology cycles have followed this pattern. Intel spends billions to develop new computer chips and to build new production facilities to produce them. Intel has found that the technology cycle for its integrated circuits is about three years. In each three-year cycle, Intel introduces a new chip, improves the chip by making it a little bit faster each year, and then replaces that chip at the end of the cycle with a brand new, different chip that is substantially faster than the old chip. At first, though, the billions Intel spends typically produce only small improvements in performance. For instance, as shown in Exhibit 7.3, Intel’s first 60 megahertz (MHz) Pentium processors ran at a speed of 51 based on the iComp Index.9 (The iComp Index is a benchmark test for measuring relative computer speed. For example, a computer with an iComp score of 200 is twice as fast as a computer with an iComp score of 100.) Yet, six months later, Intel’s new 75 MHz Pentium was only slightly faster, with an iComp speed of 67. Fortunately, as the new technology matures, researchers figure out how to get better performance from it. This is represented by point B of the S-curve in Exhibit 7.2. The steeper slope indicates that small amounts of effort will result Exhibit 7.2 in significant increases in performance. Again, Intel’s technology cycles have S-Curves and Technological followed this pattern. In fact, after six months to a year with a new chip design, Innovation Intel’s engineering and production people typically figure out how to make the new chips much faster than they were initially. For example, as shown in Exhibit 7.3, Intel soon rolled out 100 MHz, 120 MHz, 133 MHz, 150 MHz, and 166 MHz Pentium chips that were 76 percent, 117 percent, 124 percent, 149 percent, and 178 percent Discontinuity faster than the original 60 MHz speed. At point C, the flat slope again indicates that further efforts to New C Technology develop this particular technology will result in only small increases in performance. More importantly, however, point C indicates that the performance limits of that particular technology are being Old B Technology reached. In other words, additional significant improvements in A performance are highly unlikely. For example, Exhibit 7.3 shows Effort that with iComp speeds of 127 and 142, Intel’s 166 MHz and 200 MHz Pentiums were 2.49 and 2.78 times faster than its original 60 Source: R. N. Foster, Innovation: The Attacker’s Advantage (New MHz Pentiums. Yet, despite these impressive gains in performance, York: Summitt, 1986).
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Intel Computer Chips
Exhibit 7.3 iComp Index 2.0 Comparing the Relative Performance of Different Intel Microprocessors
2967 2878 2611
Pentium 4 - 3.06 GHz Pentium 4 - 3.0 GHz Pentium 4 - 2.5 GHz Pentium 4 - 2.0 GHz Pentium 4 - 1.5 GHz Pentium III - 1 GHz Pentium III - 933 MHz Pentium III - 866 MHz Pentium III - 800 MHz Pentium III - 750 MHz Pentium III - 700 MHz Pentium III - 650 MHz Pentium III - 600 E MHz Pentium III - 600 MHz Pentium III - 550 MHz Pentium III - 500 MHz Pentium III - 450 MHz Pentium II - 450 MHz Pentium II - 400 MHz Pentium II - 350 MHz Pentium II - 333 MHz Pentium II - 300 MHz Pentium II - 266 MHz Pentium II - 233 MHz Pentium - 200 MHz Pentium - 166 MHz Pentium - 150 MHz Pentium - 133 MHz Pentium - 120 MHz Pentium - 100 MHz Pentium - 75 MHz Pentium - 60 MHz
1988 1514 1276 1206 1125 1047 988 942 883 821 751 693 642 584 483 440 386 366 332 303 267 142 127 114 111 100 90 67 51 0
500
1,000
1,500
2,000
2,500
3,000
3,500
iComp Index 2.0 Sources: “Intel iComp (Full List),” Ideas International, [Online] available at http://www.ideasinternational.com/benchmark/intel/ icomp.html, 16 May 2002; “Benchmark Resources: iComp Index3.0,” Intel, [Online] available at http://developer.intel.com/ procs/perf/icomp/index.htm, 13 October 2001, “PC CPU Benchmarks, News, Prices and Reviews,” CPU Scorecard, [Online] available at http://www.cpuscorecard.com, 17 March 2003.
Intel was unable to make its Pentium chips run any faster because the basic Pentium design had reached its limits. After a technology has reached its limits at the top of the S-curve, significant improvements in performance usually come from radical new designs or new performance-enhancing materials. In Exhibit 7.2, that new technology is represented by the second S-curve. The changeover or discontinuity between the old and new technologies is represented by the dotted line. At first, the old and new technologies will likely coexist. Eventually, however, the new technology will replace the old technology. When that happens, the old technology cycle will be complete, and a new one will have started. The changeover between Intel’s Pentium processors, the old technology, and its Pentium II processors, the new technology (these chips used significantly different technologies despite their similar names), took approximately one year. Exhibit 7.3 shows this changeover or discontinuity between the two technologies. With an iComp speed of 267, the first Pentium II (233 MHz) was 88 percent faster than the last and fastest 200 MHz Pentium processor. And because their design and performance were significantly different (and faster) from Pentium II chips, Intel’s Pentium III chips represented the beginning of yet another S-curve technology cycle in integrated circuits. A 450 MHz Pentium III processor was 21 percent faster than a 450 MHz Pentium II chip. Over time, improving existing technology (tweaking the performance of the current technology cycle), combined with replacing old technology with new technology cycles (i.e., the Pentium 4 replacing the Pentium III replacing the Pentium II replacing the Pentium), has increased the speed of Pentium computer processors by a factor of 58 in just 17 years and all computer processors by a factor of 300!
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Though the evolution of Intel’s Pentium chips has been used to illustrate S-curves and technology cycles, it’s important to note that technology cycles and technological innovation don’t necessarily mean “high technology.” Remember, technology is simply the knowledge, tools, and techniques used to transform inputs into outputs. So a technology cycle occurs whenever there are major advances or changes in the knowledge, tools, and techniques of a field or discipline. For example, one of the most important technology cycles in the history of civilization occurred in 1859, when 1,300 miles of central sewer line were constructed throughout London to carry human waste to the sea more than 11 miles away. This extensive sewer system replaced the widespread practice of dumping raw sewage directly into streets, where people walked through it and where it drained into public wells that supplied drinking water. Though the relationship wasn’t known at the time, preventing waste runoff from contaminating water supplies stopped the spread of cholera that had killed millions of people for centuries in cities throughout the world.10 Safe water supplies immediately translated into better health and longer life expectancies. Indeed, the water you drink today is safe thanks to this “technology” breakthrough. So, when you think about technology cycles, don’t automatically think “high technology.” Instead, broaden your perspective by considering advances or changes in knowledge, tools, and techniques.
1.2 Innovation Streams
innovation streams Patterns of innovation over time that can create sustainable competitive advantage.
technological discontinuity A scientific advance or unique combination of existing technologies that creates a significant breakthrough in performance or function.
In Chapter 6, you learned that organizations can create competitive advantage for themselves if they have a distinctive competence that allows them to make, do, or perform something better than their competitors. Furthermore, a competitive advantage becomes sustainable if other companies cannot duplicate the benefits obtained from that distinctive competence. Technological innovation, however, not only can enable competitors to duplicate the benefits obtained from a company’s distinctive advantage but also can quickly turn a company’s competitive advantage into a competitive disadvantage. For example, through the 1970s, National Cash Register (NCR) was the leading U.S. producer of, well, cash registers. Yet, in 1971, NCR announced that it was taking a $140 million write-off for millions of brand new cash registers. If the cash registers were brand new, why couldn’t NCR sell them? NCR’s cash registers were electromechanical and had been made obsolete by newer, more powerful, and cheaper electrical cash registers.11 Technological innovation had turned NCR’s competitive advantage into a competitive disadvantage. And, in the last decade, the same electrical cash registers that began NCR’s downfall were themselves made obsolete by scanners that automatically scan prices and product information from bar codes into computerized cash registers. As NCR’s example shows, companies that want to sustain a competitive advantage must understand and protect themselves from the strategic threats of innovation. Over the long run, the best way for a company to do that is to create a stream of its own innovative ideas and products year after year. Consequently, we define innovation streams as patterns of innovation over time that can create sustainable competitive advantage.12 Exhibit 7.4 shows a typical innovation consisting of a series of technology cycles. Recall that a technology cycle begins with a new technology and ends when that technology is replaced by a newer, substantially better technology. The innovation stream in Exhibit 7.4 shows three such technology cycles. An innovation stream begins with a technological discontinuity, in which a scientific advance or a unique combination of existing technologies creates a significant breakthrough in performance or function. For example, minimally invasive techniques are revolutionizing brain surgery. When Douglas Baptist had a golf ball–sized tumor, the surgeon cut a tiny opening through his eyebrow, removed the tumor, and sewed up the opening, leaving practically no trace of
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Exhibit 7.4
Technological Discontinuity (3)
Technological Substitution (3) Incremental Change (3)
Innovation Streams: Technology Cycles over Time
Variation Discontinuous Selection
Change (3)
Dominant Design (3) Technological Discontinuity (2)
Technological Substitution (2) Incremental Change (2)
Variation Discontinuous Selection
Change (2)
Dominant Design (2) Technological Discontinuity (1) Incremental Change (1)
Variation Discontinuous Change (1) Selection Dominant Design (1)
Source: Adapted from M. L. Tushman, P. C. Anderson, & C. O’Reilly, “Technology Cycles, Innovation Streams, and Ambidextrous Organizations,” in Managing Strategic Innovation and Change, ed. M. L. Tushman & P. Anderson (1997), 3–23. (c) 1997 by Oxford University Press, Inc. Used by permission of Oxford University Press, Inc.
the operation. Previously, his skull would have been sawed open. Dr. John Mangiardi, who did the procedure, said, “We used to have to shave off half the head. We don’t do that anymore.”13 Today, surgeons use endoscopes (tiny cameras with lights attached to minisurgical tools) and MRI and CT scans (which create 3-D maps of the brain) to remove brain tumors with precision and little physical trauma. As a result, the cost and length of hospital stays associated with these surgeries have been cut in half. Technological discontinuities are followed by a discontinuous change, which is characterized by technological substitution and design competition. Technological substitution occurs when customers purchase new technologies to replace older technologies. For example, in the first half of the 1800s, letters, messages, and news traveled slowly by boat, train, or horseback, such as the famous Pony Express, which, using a large number of fresh riders and fresh horses, could deliver mail from St. Joseph, Missouri, to Sacramento, California, in 10 days.14 Between 1840 and 1860, however, many businesses began using the telegraph, which could transmit messages and news cross-country (or even around the world) in minutes rather than days, weeks, or months.15 Indeed, telegraph companies were so successful that the Pony Express went out of business almost immediately after the completion of the transcontinental telegraph, which linked telegraph systems from coast to coast. Discontinuous change is also characterized by design competition, in which the old technology and several different new technologies compete to establish a new technological standard or dominant design. Because of large investments in old technology, and because the new and old technologies are often incompatible with each other, companies and consumers are reluctant to switch to a different technology during design competition. Indeed, the telegraph was so widely used as a means of communication in the late 1800s that, at first, almost
discontinuous change The phase of a technology cycle characterized by technological substitution and design competition.
technological substitution The purchase of new technologies to replace older ones.
design competition Competition between old and new technologies to establish a new technological standard or dominant design.
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dominant design A new technological design or process that becomes the accepted market standard.
technological lockout When a new dominant design (i.e., a significantly better technology) prevents a company from competitively selling its products or makes it difficult to do so.
no one understood why telephones would be a better way to communicate. As Edwin Schlossberg explained in his book Interactive Excellence: “People could not imagine why they would want or need to talk immediately to someone who was across town or, even more absurdly, in another town. Although people could write letters to one another, and some could send telegraph messages, the idea of sending one’s voice to another place and then instantly hearing another voice in return was simply not a model that existed in people’s experience. They also did not think it was worth the money to accelerate sending or hearing a message.”16 In addition, during design competition, the older technology usually improves significantly in response to the competitive threat from the new technologies; this response also slows the changeover from older to newer technologies. Discontinuous change is followed by the emergence of a dominant design, which becomes the new accepted market standard for technology.17 Dominant designs emerge in several ways. One is critical mass, meaning that a particular technology can become the dominant design simply because most people use it. For example, even though Apple’s AAC and Microsoft’s WMA digital music file formats are arguably better (better sound, smaller file sizes), the MP3 digital file format became dominant because millions of people across the world first used Napster to exchange MP3 digital music files.18 As a result, today, nearly all new digital file formats are compatible with the MP3 format. If they weren’t, digital music lovers wouldn’t use them. Likewise, a design can become dominant if it solves a practical problem. For example, the QWERTY keyboard (the top left line of letters on a keyboard) became the dominant design for typewriters because it slowed typists who, by typing too fast, caused mechanical typewriter keys to jam. Ironically, though computers can easily be switched to the DVORAK keyboard layout, which doubles typing speed and cuts typing errors by half, QWERTY lives on as the standard keyboard. Thus, the best technology doesn’t always become the dominant design. Dominant designs can also emerge through independent standards bodies. The International Telecommunication Union (http://www.itu.ch/) is an independent organization that establishes standards for the communications industry. The ITU was founded in Paris in 1865 because European countries all had different telegraph systems that could not communicate with each other. Messages crossing borders had to be transcribed from one country’s system before they could be coded and delivered on another. After three months of negotiations, 20 countries signed the International Telegraph Convention that standardized equipment and instructions, enabling telegraph messages to flow seamlessly from country to country. Today, as in 1865, various standards are proposed, discussed, negotiated, and changed until agreement is reached on a final set of standards that communication industries (i.e., Internet, telephony, satellites, radio, etc.) will follow worldwide. For example, within a few years, multibeam, or spot-beam, technology should double or triple the speed and capacity with which satellites deliver data streams to users on earth.19 Likewise, China has developed a new standard for third-generation (3G) mobile-phone networks that is fast enough for graphics, video, and other high-speed Internet functions.20 Eventually, the ITU will choose an official standard from several competing standards for both of those technologies.21 No matter how it happens, the emergence of a dominant design is a key event in an innovation stream. First, the emergence of a dominant design indicates that there are winners and losers. Technological innovation is both competence enhancing and competence destroying. Companies that bet on the now-dominant design usually prosper. In contrast, when companies bet on the wrong design or the old technology, they may experience technological lockout,
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which occurs when a new dominant design (i.e., a significantly better technology) prevents a company from competitively selling its products or makes it difficult to do so.22 In fact, more companies are likely to go out of business in a time of discontinuous change and changing standards than in an economic recession or slowdown. Second, the emergence of a dominant design signals a shift from design experimentation and competition to incremental change, a phase in which companies innovate by lowering the cost and improving the functioning and performance of the dominant design. For example, during a technology cycle, manufacturing efficiencies enable Intel to cut the cost of its chips by one-half to two-thirds, while doubling or tripling their speed. This focus on improving the dominant design continues until the next technological discontinuity occurs.
Review 1: Why Innovation Matters Technology cycles typically follow an S-curve pattern of innovation. Early in the cycle, technological progress is slow, and improvements in technological performance are small. As a technology matures, however, performance improves quickly. Finally, as the limits of a technology are reached, only small improvements occur. At this point, significant improvements in performance must come from new technologies. The best way to protect a competitive advantage is to create a stream of innovative ideas and products. Innovation streams begin with technological discontinuities that create significant breakthroughs in performance or function. Technological discontinuities are followed by discontinuous change, in which customers purchase new technologies (technological substitution) and companies compete to establish the new dominant design (design competition). Dominant designs emerge because of critical mass, because they solve a practical problem, or because of the negotiations of independent standards bodies. Because technological innovation is both competence enhancing and competence destroying, companies that bet on the wrong design often struggle (technological lockout), while companies that bet on the eventual dominant design usually prosper. Emergence of a dominant design leads to a focus on incremental change, lowering costs and making small, but steady improvements in the dominant design. This focus continues until the next technological discontinuity occurs. 2
MANAGING INNOVATION
As the discussion of technology cycles and innovation streams showed, managers must be equally good at managing innovation in two very different circumstances. First, during discontinuous change, companies must find a way to anticipate and survive the technological changes that can suddenly transform industry leaders into losers and industry unknowns into powerhouses. Companies that can’t manage innovation following technological discontinuities risk quick organizational decline and dissolution. Second, after a new dominant design emerges following discontinuous change, companies must manage the very different process of incremental improvement and innovation. Companies that can’t manage incremental innovation slowly deteriorate as they fall farther behind industry leaders. Unfortunately, what works well when managing innovation during discontinuous change doesn’t work well when managing innovation during periods of incremental change (and vice versa). Consequently, to successfully manage innovation streams, companies need to be good at three things: 2.1 managing sources of innovation, 2.2 managing innovation during discontinuous change, and 2.3 managing innovation during incremental change.
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incremental change The phase of a technology cycle in which companies innovate by lowering costs and improving the functioning and performance of the dominant technological design.
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2.1 Managing Sources of Innovation
creative work environments Workplace cultures in which workers perceive that new ideas are welcomed, valued, and encouraged.
flow A psychological state of effortlessness, in which you become completely absorbed in what you’re doing and time seems to pass quickly.
Innovation comes from great ideas. So a starting point for managing innovation is to manage the sources of innovation, that is, where new ideas come from. One place that new ideas originate is with brilliant inventors. For example, do you know who invented the telephone, the light bulb, a way to collect and store electricity, air-conditioning, radio, television, automobiles, the jet engine, computers, and the Internet? Respectively, these innovations were created by Alexander Graham Bell, Thomas Edison, Pieter van Musschenbroek, Willis Carrier, Guglielmo Marconi, John Baird and Philo T. Farnsworth, Gottlieb Daimler and Wilhelm Maybach, Sir Frank Whittle, Charles Babbage, and Vint Cerf and Robert Kahn. These innovators and their innovations forever changed the course of modern life. Only a few companies, however, have the likes of an Edison, Marconi, or Graham Bell working for them. Given that great thinkers and inventors are in short supply, what might companies do to ensure a steady flow of good ideas? Well, when we say that innovation begins with great ideas, we’re really saying that innovation begins with creativity. Creativity is the production of novel and useful ideas.23 Although companies can’t command employees to be creative (“You will be more creative!”), they can jump-start innovation by building creative work environments, in which workers perceive that creative thoughts and ideas are welcomed and valued. As Exhibit 7.5 shows, creative work environments have six components that encourage creativity: challenging work, organizational encouragement, supervisory encouragement, work group encouragement, freedom, and a lack of organizational impediments.24 Work is challenging when it requires effort, demands attention and focus, and is perceived as important to others in the organization. According to researcher Mihaly Csikszentmihalyi (pronounced ME-high-ee CHICK-sentme-high-ee), challenging work promotes creativity because it creates a rewarding psychological experience known as “flow.” Flow is a psychological state of effortlessness, in which you become completely absorbed in what you’re doing and time seems to fly. When flow occurs, who you are and what you’re doing become one. Csikszentmihalyi first encountered flow when studying artists: “What struck me by looking at artists at work was their tremendous focus on the work, this enormous involvement, this forgetting of time and body. It wasn’t justified by expectation of rewards, like, ‘Aha, I’m going to sell this painting.’”25 Csikszentmihalyi has found that chess players, rock climbers, dancers, surgeons, and athletes regularly experience flow, too. A key part of creating flow experiences, and thus creative work environments, is to achieve a balance between skills and task challenge. When workers can do more than is
Exhibit 7.5
Organizational Encouragement
Components of Creative Work Environments
Supervisory Encouragement
Challenging Work
Creative Work Environments Work Group Encouragement
Lack of Organizational Impediments Freedom
Sources: T. M. Amabile, R. Conti, H. Coon, J. Lazenby, & M. Herron, “Assessing the Work Environment for Creativity,” Academy of Management Journal 39 (1996): 1154–1184.
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HE R IGHT T G T H I IN NG DO
required of them, they become bored, and when their skills aren’t sufficient to accomplish a task, they become anxious. When skills and task challenge are balanced, however, flow and creativity can occur. A creative work environment requires three kinds of encouragement: organizational, supervisory, and work group encouragement. Organizational encouragement of creativity occurs when management encourages risk taking and new ideas, supports and fairly evaluates new ideas, rewards and recognizes creativity, and encourages the sharing of new ideas throughout different parts of the company. Supervisory encouragement of creativity occurs when supervisors provide clear goals, encourage open interaction with subordinates, and actively support development teams’ work and ideas. Work group encouragement occurs when group members have diverse experience, education, and backgrounds and the group fosters mutual openness to ideas, positive, constructive challenge to ideas, and shared commitment to ideas. See Chapter 10 on managing teams, for further discussion of these ideas. An example of organizational and supervisory encouragement can be found at Tractor Supply Company, which sells farm supplies, equipment, and tools. Tractor Supply encourages employees to take calculated risks, and it doesn’t punish them GIVE CREDIT, DON’T TAKE IT if those risks don’t work out. Chairman Joe Scarlett explained You came up with a great idea and ran it by your boss, who loved it. Next thing you what happened after a company buyer took a gamble on a new know, the office is buzzing about this “great line of “Iron Smith” power tools for its stores: “It was well put new idea.” But instead of giving you the together as a program. But we imported the product and it was credit, your boss took the credit and shamejunk. We could have fired the buyer. But he did a wonderful lessly sold the idea as his own. Not only is job conceptually. We took our punch in the mouth and our stealing others’ ideas wrong, but nothing financial losses. Today, that buyer is our vp of marketing. The kills a creative work environment faster than only reason the line didn’t work was because the outside peonot giving people credit for their ideas. So, if ple we relied on for a piece of the execution didn’t work out. you’re the boss, no matter who comes up Most people who take risks are not doing crazy things. We just with “the” idea, give them credit. Spread the tell them to fix the problem. Nobody gets chewed out.”26 recognition and acknowledgment around so Freedom means having autonomy over one’s day-to-day that their coworkers and your boss’s boss know about your employees’ great ideas. Do work and a sense of ownership and control over one’s ideas. the right thing. Give credit where it’s due. Numerous studies have indicated that creative ideas thrive You’ll be rewarded with more great ideas.27 under conditions of freedom. On NBC’s Fear Factor TV show, contestants compete for $50,000 by performing scary, disgusting stunts. During the show’s first few years, NBC’s only restriction on the creative team was that it avoid dangerous stunts that could be easily imitated by viewers. With little to hold it back, the creative team had contestants slurp a fishhead, cockroach, beetle “milk shake” and spit it into each other’s mouths, eat roadkill (animals run over on the road), and dress like Santa Claus and deliver “gifts” to three attack dogs.28 But now the network’s censors are cracking down (i.e., less freedom) and rejecting even the mildest ideas (mild for Fear Factor). Executive producer Matt Kunitiz, who runs the creative team, says, “there are only so many things you can do with a worm.”29 To foster creativity, companies may also have to remove some impediments to creativity from their work environments. Internal conflict and power struggles, rigid management structures, and a conservative bias toward the status quo can all discourage creativity. They create the perception that others in the organization will decide which ideas are acceptable and deserve support. One way in which many companies avoid a conservative, anti-innovation bias is to ask their customers for ideas. After all, if customers are enthusiastic about new ideas, it’s harder to discount them. For example, Sportime International sold a million Hands-On basketballs with color-coded markings that show kids where to place their hands for better shooting accuracy. The idea was suggested by
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COURTESY OF SPORTIME, LLC. PHOTO: © JAMES GILL / THE CORNING LEADER
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nine-year-old Chris Haas, who has made $35,000 in royalties thus far from the suggestion. Spinmaster started selling its Proshops line of simple, unassembled skateboards and bicycles that kids could put together themselves with interchangeable parts. The idea came from its “kids’ advisory board.” The unassembled Proshops products and bikes far outsell its already assembled products.30
2.2 Experiential Approach: Managing Innovation during Discontinuous Change
A study of 72 product-development projects (i.e., innovation) in 36 computer companies across the United States, Europe, and Asia found that companies that succeeded in periods of discontinuous change (characterized by technological substitution and design competition, as described earlier) typically followed an experiential approach to innovation.31 The experiential approach to innovation assumes that innovation is occurring within a highly uncertain environment and that the key to fast product innovation is to use intuition, flexible options, and hands-on experience to reduce uncerCompanies can avoid internal impediments to creativity by looking tainty and accelerate learning and understanding. As Exhibit 7.6, shows, the outside the organization. Customers experiential approach to innovation has five aspects: design iterations, testing, are an important source of milestones, multifunctional teams, and powerful leaders.32 innovation. Sportime International An “iteration” is a repetition. So a design iteration is a cycle of repetition in followed a customer idea and which a company tests a prototype of a new product or service, improves on the created Hands-On basketballs for children who need help learning how design, and then builds and tests the improved product or service prototype. to shoot. A product prototype is a full-scale working model that is being tested for design, function, and reliability. Testing is a systematic comparison of different product experiential approach to designs or design iterations. Companies that want to create a new dominant innovation design following a technological discontinuity quickly build, test, improve, and An approach to innovation that retest a series of different product prototypes. When Avery Dennison Corporaassumes a highly uncertain tion decided to build a new label printer for offices, focus groups complained environment and uses intuition, about paper cuts, the difficulty of peeling labels, the ends of labels sticking flexible options, and hands-on experience to reduce uncertainty together, and labels that got dirty or wrinkled with handling. Office worker and accelerate learning and Heather Wilson said, “If all you had to do is just grab a label off and stick it on, understanding. it would save a lot of time.”33 Accordingly, Avery designed a prototype printer that prints and then partially peels each label. When Avery tested the prototype design iteration in offices, workers said that it was too heavy to move, its large electrical plug A cycle of repetition in which a wouldn’t fit a standard surge protector strip, and it was too loud. After numercompany tests a prototype of a new product or service, improves on that ous design iterations, Avery’s Quick Peel Automatic Label Peeler is quiet, design, and then builds and tests the weighs just seven pounds, and can print 500 labels in just 30 minutes, comimproved prototype. pared to 54 minutes for earlier printers. By trying a number of very different designs, or by making successive product prototype A full-scale working model that is improvements and changes in the same design, frequent design iterations reduce being tested for design, function, uncertainty and improve understanding. Simply put, the more prototypes and reliability. you build, the more likely you are to learn what works and what doesn’t. Also, when designers and engineers build a number of prototypes, they are less testing Systematic comparison of different likely to “fall in love” with a particular prototype. Instead, they’ll be more conproduct designs or design iterations. cerned with improving the product or technology as much as they can. Testing speeds up and improves the innovation process, too. When two very different design prototypes are tested against each other, or the new design iteration is tested against the previous iteration, product design strengths and weaknesses quickly become apparent. Likewise, testing uncovers errors early in the design
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Experimental Approach to Innovation: Managing Innovation During Discontinuous Change
Compression Approach to Innovation: Managing Innovation During Incremental Change
Environment
Highly uncertain discontinuous change - technological substitution and design competition
Certain incremental change - established technology (i.e., dominant design)
Goals
Speed Significant improvements in performance Establishment of new dominant design
Speed Lower costs Incremental improvements in performance of dominant design
Approach
Build something new, different, and substantially better
Compress time and steps needed to bring about small improvements
Steps
Design iterations Testing Milestones Multifunctional teams Powerful leaders
Planning Supplier involvement Shortening the time of individual steps Overlapping steps Multifunctional teams
Exhibit 7.6
process when they are easiest to correct. Finally, testing accelerates learning and understanding by forcing engineers and product designers to examine hard data about product performance. When there’s hard evidence that prototypes are testing well, the confidence of the design team grows. Also, personal conflict between design team members is less likely when testing focuses on hard measurements and facts rather than personal hunches and preferences. Milestones are formal project review points used to assess progress and performance. For example, a company that has put itself on a 12-month schedule to complete a project might schedule milestones at the 3-month, 6-month, and 9-month points on the schedule. By making people regularly assess what they’re doing, how well they’re performing, and whether they need to take corrective action, milestones provide structure to the general chaos that follows technological discontinuities. Milestones also shorten the innovation process by creating a sense of urgency that keeps everyone on task. For example, when Florida Power & Light was building its first nuclear power facility, the company’s construction manager passed out 2,000 desk calendars to company employees, construction contractors, vendors, and suppliers to ensure that everyone involved in the project was aware of the construction time line. Contractors that regularly missed deadlines were replaced.34 Finally, milestones are beneficial for innovation because meeting regular milestones builds momentum by giving people a sense of accomplishment. Multifunctional teams are work teams composed of people from different departments. Multifunctional teams accelerate learning and understanding by mixing and integrating technical, marketing, and manufacturing activities. By involving all key departments in development from the start, multifunctional teams speed innovation through early identification of new ideas or problems that would typically not have been generated or addressed until much later. Ford relied on multifunctional teams to design its hybrid sport utility vehicle (SUV) that runs on gas and battery power. The hybrid version of the Ford Escape is powerful enough to tow a boat, but still gets 36 miles per gallon. At Ford, researchers, who dream up and test ideas, and product engineers, who find ways to get them to work, usually work in separate buildings. But, to design the hybrid Escape, they worked side-by-side in cubicles for over three years. Team member Tom Gee said, “Before, it might have been a half mile apart, but even one building away is a barrier compared with what we have now. It makes a huge difference.”35 Working side-by-side was critical to figuring out how
Comparing the Experiential and Compression Approaches to Managing Innovation
milestones Formal project review points used to assess progress and performance.
multifunctional teams Work teams composed of people from different departments.
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to prevent the battery from being damaged by overcharging in cold weather. Ford’s researchers and engineers solved the problem by designing sensors and software that monitor the energy sent to the battery (when the gas engine is being used) 50,000 times per second, making sure that the energy is sufficient to recharge the battery but not enough to damage it. Powerful leaders provide the vision, discipline, and motivation to keep the innovation process focused, on time, and on target. Powerful leaders are able to get resources when they are needed, are typically more experienced, have high status in the company, and are held directly responsible for the products success or failure. On average, powerful leaders can get innovation-related projects done nine months faster than leaders with little power or influence. One such powerful leader is Phil Martens, head of Ford’s product development. With a year to go and Ford’s hybrid Escape months behind schedule, he told the team, “We are going to deliver on time. . . . Anything you need you’ll get.”36 Martens said, “You could have heard a pin drop.” But he followed this declaration by strongly supporting the team. Despite daily inquiries “from above,” he promised no interruptions or interference from anyone—even top management. And, when the team members needed something, they got it without waiting. When language differences created problems with the Japanese company that made the hybrid’s batteries, “a Ford battery expert fluent in Japanese was dispatched to Japan within 24 hours.”37 Martens said, “I allowed them to be entrepreneurial, and they doubled their productivity.” Mary Ann Wright, the launch manager charged with making sure the project stayed on schedule, said, “The same people who had been coming into my office saying, ‘I don’t know how we’re going to get there,’ were saying within weeks and months, ‘My God, we can get there.’”38
2.3 Compression Approach: Managing Innovation during Incremental Change
compression approach to innovation An approach to innovation that assumes that incremental innovation can be planned using a series of steps and that compressing those steps can speed innovation.
As Exhibit 7.6 shows, whereas the experiential approach is used to manage innovation in highly uncertain environments during periods of discontinuous change, the compression approach is used to manage innovation in more certain environments during periods of incremental change. And whereas the goals of the experiential approach are significant improvements in performance and the establishment of a new dominant design, the goals of the compression approach are lower costs and incremental improvements in the performance and function of the existing dominant design. The general strategies in each approach are different, too. With the experiential approach, the general strategy is to build something new, different, and substantially better. Because there’s so much uncertainty—no one knows which technology will become the market leader—companies adopt a winner-take-all approach by trying to create the market-leading, dominant design. With the compression approach, the general strategy is to compress the time and steps needed to bring about small, consistent improvements in performance and functionality. Because a dominant technology design already exists, the general strategy is to continue improving the existing technology as rapidly as possible. In short, a compression approach to innovation assumes that innovation is a predictable process, that incremental innovation can be planned using a series of steps, and that compressing the time it takes to complete those steps can speed up innovation. As Exhibit 7.6 shows, the compression approach to innovation has five aspects: planning, supplier involvement, shortening the time of individual steps, overlapping steps, and multifunctional teams.39 In Chapter 5, planning was defined as choosing a goal and a method or strategy to achieve that goal. When planning for incremental innovation, the goal is to squeeze or compress development time as much as possible, and the general strategy is to create a series of planned steps to accomplish that goal. Planning for incremental innovation helps avoid unnecessary steps and
Chapter 7: Innovation and Change
enables developers to sequence steps in the right order to avoid wasted time and delays between steps. Planning also reduces misunderstandings and improves coordination. Most planning for incremental innovation is based on the idea of generational change. Generational change occurs when incremental improvements are made to a dominant technological design such that the improved version of the technology is fully backward compatible with the older version.40 Software is backward compatible if a new version of the software will work with files created by older versions. For example, the latest version of Microsoft Word will read and work with files saved in Microsoft Word formats that are more than 10 years old (e.g., Word 6 from 1995). Because the compression approach assumes that innovation can follow a series of preplanned steps, one of the ways to shorten development time is supplier involvement. Delegating some of the preplanned steps in the innovation process to outside suppliers reduces the amount of work that internal development teams must do. Plus, suppliers provide an alternative source of ideas and expertise that can lead to better designs. When Bombardier Aerospace designed its new Continental business jet, it relied heavily on 30 suppliers to design and test new parts and share in the $500 million development cost. In today’s jets, it is essential that the various electronic components, most of which are computer controlled, do not interfere with each other (this is why you’re asked to turn off all electrical devices before takeoff and touchdown). Instead of handling this itself, Bombardier relied on supplier Rockwell Collins, which built an electronics integration testing unit to ensure that the electronic controls for the throttles, wings and rudders, radar, and other components were compatible.41 In general, the earlier suppliers are involved, the quicker they catch and prevent future problems, such as unrealistic designs or mismatched product specifications. Another way to shorten development time is simply to shorten the time of individual steps in the innovation process. A common way to do that is through computer-aided design (CAD). CAD speeds up the design process by allowing designers and engineers to make and test design changes using computer models rather than physically testing expensive prototypes. CAD also speeds innovation by making it easy to see how design changes affect engineering, purchasing, and production. Karenann Terrell, director of e-business strategy at DaimlerChrysler, explains how the company’s CAD system, FastCar, works: FastCar takes a virtual CAD/CAM design and teams it with all the other information that we already have on hand about the part or vehicle. So, no longer do we change a part and then ask: “How much do those new components cost? What are the quality implications?” As we make changes, all that information is integrated into the new designs. Think of the side of a sedan where the hood and fender come together . . . when we brought them together in a digital mockup, there was a bigger gap than we wanted. Using FastCar technology, we were able to work out the effects of a proposed design change before it was made. In this case, we notified the engineers of the fender and hood, as well as the supplier of a plastic attachment in the wheel well. That vendor said: “If you make that change, I need to cut a new tool, which will cost you lots of money. Why don’t I just move my fastening point? Then you don’t have a gap.” So we didn’t have to make a design change. In the old world, it would have been four or five weeks before we knew about the supplier’s tool change.”42 In a sequential design process, each step must be completed before the next step begins. But sometimes multiple development steps can be performed at the same time. Overlapping steps shorten the development process by reducing delays or waiting time between steps. By using overlapping rather than sequential steps, most car companies have reduced the time it takes to develop a new car from five years to three years. However, they still develop new models
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generational change Change based on incremental improvements to a dominant technological design such that the improved technology is fully backward compatible with the older technology.
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sequentially. First, they design and build, say, a four-door sedan. Then, after perfecting the design and manufacture of the sedan, two or three years later they introduce the two-door coupe. A couple of years after that, they introduce the station wagon version of the same model. Toyota, however, takes the notion of overlapping steps even further by developing all three versions (four-door sedan, two-door coupe, and station wagon) simultaneously. By overlapping model development, Toyota has cut its total development time for all three models in half, enabling it to bring 18 new or redesigned cars to market in just two years. Its Picnic and Corolla Spacio models went into production just 141/2 months after designs were approved, well under the three years it normally takes to develop a new car.43 In some cases, Toyota has squeezed development time even more, cutting the time between initial design and production to just 8 months.44
Review 2: Managing Innovation To successfully manage innovation streams, companies must manage the sources of innovation and learn to manage innovation during both discontinuous and incremental change. Since innovation begins with creativity, companies can manage the sources of innovation by supporting a creative work environment in which creative thoughts and ideas are welcomed, valued, and encouraged. Creative work environments provide challenging work; offer organizational, supervisory, and work group encouragement; allow significant freedom; and remove organizational impediments to creativity. Companies that succeed in periods of discontinuous change typically follow an experiential approach to innovation. The experiential approach assumes that intuition, flexible options, and hands-on experience can reduce uncertainty and accelerate learning and understanding. This approach involves frequent design iterations, frequent testing, regular milestones, creation of multifunctional teams, and use of powerful leaders to guide the innovation process. A compression approach to innovation works best during periods of incremental change. This approach assumes that innovation can be planned using a series of steps and that compressing the time it takes to complete those steps can speed up innovation. The five aspects of the compression approach are planning (generational change), supplier involvement, shortening the time of individual steps (computer-aided design), overlapping steps, and multifunctional teams.
Organizational Change The idea was simple. Build a series of music superstores and watch the customers and profits pour in. For a while, it worked. Sales at MARS Music grew from $49 million to $340 million in just five years as the company built 50 new stores. But, during the same period that MARS set records for sales, it also lost $100 million. When MARS when out of business, founder Mark Bergelman blamed the poor economy and tight capital markets. Chief operating officer Ray Miller was more blunt, saying, “Our stores were too big.”45 Bergelman, who successfully founded Office Depot, insisted that each MARS Music store cover 35,000 square feet with $2.5 million in inventory and a staff of 40. But, at that size, the breakeven point for each store was $10 million in sales per year. By contrast, the stores of Guitar Centers, Mars’ leading competitor, were half as large at 17,000 square feet and had a much lower breakeven point. When MARS Music went out of business, investors lost $190 million, music equipment suppliers lost $35 million, landlords who had financed $1.8 million in improvements at each store location lost $50 million, and 2,400 people lost their jobs.
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The company’s collapse wasn’t a surprise. MARS Music and everyone else in the industry knew it was hemorrhaging cash. Yet MARS Music was unable to change its business to stop the bleeding. That inability to change, to figure out ways to bring in more customers and to be more efficient, eventually led to its demise. After reading the next two sections on organizational change, you should be able to 3 4
3
discuss why not changing can lead to organizational decline. discuss the different methods that managers can use to better manage change as it occurs.
ORGANIZATIONAL DECLINE: THE RISK OF NOT CHANGING
© LYNN GOLDSMITH/CORBIS
Businesses operate in a constantly changing environment. Recognizing and adapting to internal and external changes can mean the difference between continued success and going out of business. Companies that fail to change run the risk of organizational decline.46 Organizational decline occurs when companies don’t anticipate, recognize, neutralize, or adapt to the internal or external pressures that threaten their survival.47 In other words, decline occurs when organizations don’t recognize the need for change. General Motors’ loss of market share in the automobile industry (from 50 to 25 percent) is an example of organizational decline. There are five stages of organizational decline: blinded, inaction, faulty action, crisis, and dissolution.48 In the blinded stage, decline begins because key managers fail to recognize the internal or external changes that will harm their organizations. This “blindness” may be due to a simple lack of awareness about changes or an inability to understand their significance. It may also come from the overconfidence that can develop when a company has been successful. For example, Barneys started as a tiny men’s discount clothing store in New York City and grew into an international phenomenon with stores in Beverly Hills, Chicago, London, Tokyo, and a dozen other cities. Barneys sold some of the most expensive and fashionable designer clothes in the world until the overconfidence of the founder’s grandsons, Gene and Bob Pressman, eventually led to the company’s demise.49 In his book The Rise and Fall of the House of Barneys: A Family Tale of Chutzpah, Glory, and Greed, Joshua Levine of Forbes magazine described how overconfidence led the Pressmans to spend more time working out at the gym than running the company.50 Sure of their success, the Pressmans blindly overspent and overbuilt the company. Indeed, just three years after opening a luxurious $270 million store on Madison Avenue in New York City, complete with marble floors, silver-plated windows, and an extravagantly priced restaurant, espresso bar, beauty salon, and health club, Barneys filed for bankruptcy. In the inaction stage, as organizational performance problems become more visible, management may recognize the need to change but still take no action. The managers may be waiting to see if the problems will correct themselves. Or, they may find it difficult to change the practices and policies that previously led to success. Possibly, too, they wrongly assume that they can easily correct the problems, so they don’t feel the situation is urgent. For example, when Barneys expanded from men’s into women’s clothing, management budgeted $12 million to buy and convert a building into a 70,000-squarefoot women’s clothing store. When the store ended up costing $25 million, more than double the
organizational decline A large decrease in organizational performance that occurs when companies don’t anticipate, recognize, neutralize, or adapt to the internal or external pressures that threaten their survival.
When key managers fail to recognize the internal or external changes that will harm their organizations, decline is sure to follow. Sure of their success, the Pressmans blindly overspent and overbuilt Barneys, only to have to file for bankruptcy three years into their extravagant corporate spending spree.
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estimate—a prospect that would have worried most managers—one of Barneys’ top managers exclaimed, “What’s money?”51 In the faulty action stage, faced with rising costs and decreasing profits and market share, management will announce “belt-tightening” plans designed to cut costs, increase efficiency, and restore profits. In other words, rather than recognizing the need for fundamental changes, managers assume that if they just run a “tighter ship,” company performance will return to previous levels. Barneys fit this pattern, too. Rather than reexamine the basic need for change, Barneys’ management focused on cost cutting. Company managers and staff were no longer allowed to spend hundreds of thousands of dollars a year on perks such as cell phones, cars, and entertainment. In fact, some senior managers had clothing allowances of $20,000 a year.52 Unfortunately for Barneys, this belt-tightening move was too little too late. In the crisis stage, bankruptcy or dissolution (i.e., breaking up the company and selling its parts) is likely to occur unless the company completely reorganizes the way it does business. At this point, however, companies typically lack the resources to fully change how they run their businesses. Cutbacks and layoffs will have reduced the level of talent among employees. Furthermore, talented managers who were savvy enough to see the crisis coming will have found jobs with other companies (often with competitors). Because of rising costs and lower sales, cash is tight. And lenders and suppliers are unlikely to extend further loans or credit to ease the cash crunch. For example, after giving Barneys more than $180 million in loans, its bankers refused to lend the company any more money. In the dissolution stage, after failing to make the changes needed to sustain the organization, the company is dissolved through bankruptcy proceedings or by selling assets in order to pay suppliers, banks, and creditors. At this point, a new CEO may be brought in to oversee the closing of stores, offices, and manufacturing facilities, the final layoff of managers and employees, and the sale of assets. In fact, after filing for bankruptcy, Barneys closed four stores, including the original Barneys.53 Three years later, Barneys was sold to two investment companies that brought in new management to rebuild the company.54 Finally, note that because decline is reversible at each of the first four stages, not all companies in decline reach final dissolution as Barneys did. For example, GM is trying to aggressively cut costs, stabilize its shrinking market share, and use innovative production techniques in an effort to reverse a decline that has lasted nearly a decade and resulted in all-time low stock prices.
Review 3: Organizational Decline: The Risk of Not Changing The five-stage process of organizational decline begins when organizations don’t recognize the need for change. In the blinded stage, managers fail to recognize the changes that threaten their organization’s survival. In the inaction stage, management recognizes the need to change, but doesn’t act, hoping that the problems will correct themselves. In the faulty action stage, management focuses on cost cutting and efficiency rather than facing up to the fundamental changes needed to ensure survival. In the crisis stage, failure is likely unless fundamental reorganization occurs. Finally, in the dissolution stage, the company is dissolved through bankruptcy proceedings, by selling assets to pay creditors, or through the closing of stores, offices, and facilities. If companies recognize the need to change early enough, however, dissolution may be avoided. 4 change forces Forces that produce differences in the form, quality, or condition of an organization over time.
MANAGING CHANGE
According to social psychologist Kurt Lewin, change is a function of the forces that promote change and the opposing forces that slow or resist change.55 Change forces lead to differences in the form, quality, or condition of an organization over time.
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By contrast, resistance forces support the status quo, that is, the existing conditions in organizations. With great views, fine service, and good food, Atwaters, located on top of the 30-story U.S. Bancorp tower in Portland, Oregon, “wanted to be the best restaurant in town and didn’t care how much it cost.” Under new manager Stephen Earnhart, however, Atwaters’ new goal was to be the best restaurant in town and make a profit. To attract younger customers, waiters replaced their tuxedos with more casual white aprons and ties. Instead of a team of waiters at each table (waiters, back waiters, and maître d’s), service was personalized by having each waiter take responsibility for particular tables in the dining room. When it was slow in the bar, bartenders were asked to help out in the dining room. When it was slow in the dining room, waiters were asked to help out in the bar. Within weeks, employees began to complain. “That’s not my job.” “That’s not what I was hired for.” “You’re asking me to do more, but you’re not paying me for it.” As employee dissatisfaction with the changes grew stronger, food began disappearing from the kitchen. Bartenders gave away drinks. The reservation book vanished on busy nights. Stephen Gagnon, a former Atwaters bartender, summed things up, saying, “Employee morale went to hell with all the changes.”56 Resistance to change, like that shown by Atwaters’ employees, is caused by self-interest, misunderstanding and distrust, and a general intolerance for change.57 People resist change out of self-interest because they fear that change will cost or deprive them of something they value. For example, resistance might stem from a fear that the changes will result in a loss of pay, power, responsibility, or even perhaps one’s job. People also resist change because of misunderstanding and distrust; they don’t understand the change or the reasons for it, or they distrust the people, typically management, behind the change. For example, James Selby, a former waiter at Atwaters, said, “A lot of us felt the changes were unjustified.”58 Resistance isn’t always visible at first, however. In fact, some of the strongest resisters may initially support the changes in public, nodding and smiling their agreement, but then ignore the changes in private and do their jobs as they always have. Management consultant Michael Hammer calls this deadly form of resistance the “Kiss of Yes.”59 Resistance may also come from a generally low tolerance for change. Some people are simply less capable of handling change than others. People with a low tolerance for change feel threatened by the uncertainty associated with change and worry that they won’t be able to learn the new skills and behaviors needed to successfully negotiate change in their companies.
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resistance forces Forces that support the existing conditions in organizations.
resistance to change Opposition to change resulting from self-interest, misunderstanding and distrust, or a general intolerance for change.
Because resistance to change is inevitable, successful change efforts require careful management. In this section you will learn about: 4.1 managing resistance to change, 4.2 what not to do when leading organizational change, and 4.3 different change tools and techniques.
4.1 Managing Resistance to Change According to Kurt Lewin, managing organizational change is a basic process of unfreezing, change intervention, and refreezing. Unfreezing is getting the people affected by change to believe that change is needed. During the change intervention itself, workers and managers change their behavior and work practices. Refreezing is supporting and reinforcing the new changes so that they “stick.” Resistance to change, as shown by Atwaters’ employees, is an example of frozen behavior. Given the choice between changing and not changing, most people would rather not change. Because resistance to change is natural and inevitable, managers need to unfreeze resistance to change to create successful change programs. The following methods can be used to manage resistance to change: education and communication, participation, negotiation, top management support, and coercion.60
unfreezing Getting the people affected by change to believe that change is needed.
change intervention The process used to get workers and managers to change their behavior and work practices.
refreezing Supporting and reinforcing new changes so that they “stick.”
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When resistance to change is based on insufficient, incorrect, or misleading information, managers should educate employees about the need for change and communicate change-related information to them. Managers must also supply the information and funding or other support employees need to make changes. For example, resistance to change can be particularly strong when one company buys another company. Jeff Boyd, who worked for a large Canadian company that was acquired, described the first meeting between his department and the same department from the acquiring company: “It wasn’t a friendly meeting. It wasn’t hostile or anything like that, but everybody was on their guard a little bit. Right now, everybody’s wondering if they’ll be able to get along with the other employees, because there’s a big difference in both companies’ cultures and in the way both companies operate.” Boyd concluded, “There’s a lot of tension down at the employee level. We’re still being kept in the dark about certain things. Everything seems to be up in the air right now.”61 By contrast, New York Presbyterian Health System reduced resistance to change by designating mentors to coach individuals, groups, and departments in newly acquired companies about its procedures and practices. New York Presbyterian’s Diane Iorfida said, “Keeping employees informed every step of the way is so important. It’s also important to tell the truth, whatever you do. If you don’t know, say you don’t know.”62 Another way to reduce resistance to change is to have those affected by the change participate in planning and implementing the change process. Employees who participate have a better understanding of the change and the need for it. Furthermore, employee concerns about change can be addressed as they occur if employees participate in the planning and implementation process. As you learned in Chapter 6, CEO A. G. Lafley turned around Procter & Gamble by refocusing the company on its billion-dollar brands (e.g., Tide, Pantene). Martin Neuchtern, chief of global hair care, said, “A. G. made things very clear: Make sure you focus on Pantene.”63 While Lafley clearly shifted the focus to P&G’s best brands, the strategies to reenergize those brands were generated through employee participation. At an informal luncheon with mid-level managers, Lafley stated, “I don’t have a speech planned. I thought we could talk. I’m searching for meaty issues. Give me some meaty issues.”64 Then, he listened to their ideas. Vice president Chris Start said, “You can tell him bad news or things you’d be afraid to tell other bosses.”65 As a result, there was little resistance to Lafley’s sweeping changes at P&G. Employees are also less likely to resist change if they are allowed to discuss and agree on who will do what after change occurs. The Chugach School District in Anchorage, Alaska, had some of the lowest test scores in the state. For superintendent Richard DeLoreozo, that was a clear sign that change was needed. After designing a system that would allow each student to advance at his or her own learning pace, DeLoreozo turned to teacher compensation. But rather than make wholesale changes himself, he went to the teacher’s union for input. Together, DeLoreozo and the union developed a program that based teachers’ pay on the average improvement of the entire district’s students, rather than seniority. Four years later, after enthusiastic support from teachers and students, the district’s standardized test scores improved from the 28th to the 71st percentile in the state.66 Resistance to change also decreases when change efforts receive significant managerial support. Managers must do more than talk about the importance of change, though. They must provide the training, resources, and autonomy needed to make change happen. For example, with a distinguished 70-year history of hand drawing Hollywood’s most successful animated films (Snow White, Bambi, The Little Mermaid, Beauty and the Beast), it was natural for animators at Walt Disney Company to resist the move to computer-generated (CG) animation. David Stainton, chief of animation, said his animators “fundamentally worry that, 20 years from now, nobody will know how to draw.
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They’re afraid they won’t be able to express their skill to the same level.”67 Animator Bill Keane worried that “I would have to go backwards from what I do by hand.”68 So Stainton told his animators, “Your talent really lies in . . . your ability to bring characters to life,” and that can be done through drawing or computers.69 Disney supported the difficult change by putting all of its animators through a six-month “CG Boot Camp,” where they learned how to “draw” animated characters with computers. Finally, resistance to change can be managed through coercion, or the use of formal power and authority to force others to change. Because of the intense negative reactions it can create (e.g., fear, stress, resentment, sabotage of company products), coercion should be used only when a crisis exists or when all other attempts to reduce resistance to change have failed. Exhibit 7.7 summarizes some additional suggestions for what managers can do when employees resist change.
coercion Using formal power and authority to force others to change.
4.2 What Not to Do When Leading Change So far, you’ve learned about the basic change process (unfreezing, change, refreezing) and managing resistance to change. However, John Kotter of the Harvard Business School argues that knowing what not to do is just as important as knowing what to do when it comes to achieving successful organizational change.70 Exhibit 7.8 shows the most common errors that managers make when they lead change. The first two errors occur during the unfreezing phase, when managers try to get the people affected by change to believe that change is really needed. The first and potentially most serious error is not establishing a great enough sense of urgency. Indeed, Kotter estimates that more than half of all change efforts fail because the people affected are not convinced that change is necessary. People will feel a greater sense of urgency if a leader in the company makes a public, candid assessment of the company’s problems and weaknesses. For example, Continental Airlines former CEO Gordon Bethune said, “We had a crappy product, and we were trying to discount ourselves into profitability. Nobody wants to eat a crummy pizza, no matter if it’s 99 cents.”71 By sharing extensive (and depressing) financial information with Continental’s workers, Bethune made it clear that the company was truly at risk of going bankrupt. Because employees knew that no airline had ever recovered from bankruptcy, they concluded that accepting change was the only reasonable option, and resistance to change evaporated.72 The second mistake that occurs in the unfreezing process is not creating a powerful enough coalition. Change often starts with one or two people, but to build enough momentum to change an entire department, division, or company,
Exhibit 7.7 What to Do When Employees Resist Change
Unfreezing
• Share reasons • Empathize • Communicate
Share the reasons for change with employees. Be empathetic to the difficulties that change will create for managers and employees. Communicate the details simply, clearly, extensively, verbally, and in writing. Change
• • • • • • •
Benefits Champion Input Timing Security Training Pace
Explain the benefits, “what’s in it for them.” Identify a highly respected manager to manage the change effort. Allow the people who will be affected by change to express their needs and offer their input. Don’t begin change at a bad time, for example, during the busiest part of the year or month. If possible, maintain employees’ job security to minimize fear of change. Offer training to ensure that employees are both confident and competent to handle new requirements. Change at a manageable pace. Don’t rush.
Source: G. J. Iskat & J. Liebowitz, “What to Do When Employees Resist Change,” Supervision, 1 August 1996.
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change has to be supported by a critical and growing group of people. Besides top management, Kotter recommends that key employees, managers, board members, customers, and even union leaders be members of a core change coalition, which guides and supports organizational change. Procter & Gamble’s CEO A. G. Lafley said, “I put together the guiding coalition—the leaders who would go with me. If you are going to make a significant change, you have to declare where are we going and why are we going there. Then you have to put together this guiding coalition. You have to put the true disciples together—the prophets who believe in it as passionately as you do. And they help you to carry the organization, because you can’t carry a 100,000-person organization spread across 80 to 100 countries by yourself.”73 Furthermore, it’s important to strengthen this group’s resolve by periodically bringing its members together for off-site retreats. The next four errors that managers make occur during the change phase, when a change intervention is used to try to get workers and managers to change their behavior and work practices. Lacking a vision for change is a significant error at this point. As you learned in Chapter 5, a vision is a statement of a company’s purpose or reason for existing. A vision for change makes clear where a company or department is headed and why the change is occurring. Change efforts that lack vision tend to be confused, chaotic, and contradictory. By contrast, change efforts guided by visions are clear and easy to understand and can be effectively explained in five minutes or less. At Continental Airlines, the initial change vision was simple: “getting passengers where they were supposed to be on time.”74 With this clear-cut vision focusing managers and workers, Continental now ranks fourth in on-time arrivals and fifth in baggage handling (out of 19 airlines).75 Previously, it had ranked tenth on both.76 Undercommunicating the vision by a factor of 10 is another mistake in the change phase. According to Kotter, companies mistakenly hold just one meeting to announce the vision. Or, if the new vision receives heavy emphasis in executive speeches or company newsletters, senior management then undercuts the vision by behaving in ways contrary to it. Successful communication of the vision requires that top managers link everything the company does to the new vision and that they “walk the talk” by behaving in ways consistent with the vision. Furthermore, even companies that begin change with a clear vision sometimes make the mistake of not removing obstacles to the new vision. They leave formidable barriers to change in place by failing to redesign jobs, pay plans, and Exhibit 7.8 technology to support the new way of doing things. One way Continental Errors Managers Make When Leading Change removed obstacles to its new vision was by completely rewriting its employee policy manual. Former CEO Bethune said, “And we don’t call it a manual anymore; we call it guideUnfreezing lines. The new guidelines are supposed to help 1. Not establishing a great enough sense of urgency. employees solve problems—give them a sense of 2. Not creating a powerful enough guiding coalition. where the boundaries are when they run into trouble. Change But in the general pursuit of their jobs, we want them to use their heads and use their resources.” In 3. Lacking a vision. short, “if you find yourself in the middle of some4. Undercommunicating the vision by a factor of 10. thing complicated, something unusual, something 5. Not removing obstacles to the new vision. that just doesn’t fit, then use your head and make 6. Not systematically planning for and creating short-term wins. the best decision you can.”77 Refreezing Another error in the change phase is not 7. Declaring victory too soon. systematically planning for and creating short8. Not anchoring changes in the corporation’s culture. term wins. Most people don’t have the discipline and patience to wait two years to see if the new Source: J. P. Kotter, “Leading Change: Why Transformation Efforts Fail,” Harvard Business Review 73, no. 2 (March-April 1995): 59. change effort works. Change is threatening and
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uncomfortable, so people need to see an immediate payoff if they are to continue to support it. Kotter recommends that managers create short-term wins by actively picking people and projects that are likely to work extremely well early in the change process. The short-term wins at Continental came in the form of $65 checks. Bethune told managers and employees that every employee would get a check for $65 each month that Continental finished in the top five in on-time arrivals (as rated by the Department of Transportation). The first time that Continental made it into the top five, it sent out $2.5 million worth of $65 checks to its employees. Bethune said, “We didn’t just drop 65 extra dollars into their paychecks and have the whole impact of their bonus disappear. Nor did we let them start calculating how much of it they lost to taxes. We gave each employee $65 in a special check—we took the withholding out of their regular paychecks so they got 65 actual dollars.”78 In all, Continental spent more than $100 million for on-time bonuses to reward and remind its employees that getting customers to their travel destinations on time is one of the most important things it does.79 The last two errors that managers make occur during the refreezing phase, when attempts are made to support and reinforce changes so that they “stick.” Declaring victory too soon is a tempting mistake in the refreezing phase. Managers typically declare victory right after the first large-scale success in the change process. For instance, it would have been easy for Continental to declare victory the first time that it made it into the top five in on-time arrivals. Declaring success too early has the same effect as draining the gasoline out of a car. It stops change efforts dead in their tracks. With success declared, supporters of the change process stop pushing to make change happen. After all, why “push” when success has been achieved? Rather than declaring victory, managers should use the momentum from short-term wins to push for even bigger or faster changes. This maintains urgency and prevents change supporters from slacking off before the changes are frozen into the company’s culture. For example, after quickly moving into the top five in on-time arrivals, Continental maintained urgency by raising the requirements for monthly, on-time bonuses. Now, instead of the top five, Continental had to finish in the top three in on-time arrivals. When it raised the bar, it also raised the reward, increasing the on-time bonus from $65 to $100. Moreover, former CEO Bethune instituted a reward system that maintained urgency among company managers by awarding bonuses only if all of Continental’s top 25 executives met their goals. Bethune said, “We had to have all these people working collectively. We put in a compensation program for the 20 top executives that meant they were paid on meeting quarterly budget results and getting 25 percent of your bonus each quarter. You miss the number, you can’t get the money back. It kept us all really focused for three months at a time. We never missed our number, and either we all got paid or none of us did. Marketing could not fight with sales; it just ended internecine warfare.”80 The last mistake that managers make is not anchoring changes in the corporation’s culture. An organization’s culture is the set of key values, beliefs, and attitudes shared by organizational members that determines the “accepted way of doing things” in a company. As you learned in Chapter 3, changing cultures is extremely difficult and slow. Kotter said that two things help anchor changes in a corporation’s culture. The first is directly showing people that the changes have actually improved performance. At Continental, this was easily demonstrated by the company’s improved rankings for on-time arrival and baggage handling. The second is to make sure that the people who get promoted fit the new culture. If they don’t, it’s a clear sign that the changes were only temporary. When did former CEO Gordon Bethune know that the changes he was seeking were anchored in Continental’s culture? He was getting on a Continental flight at the last minute, as the gate agent was scrambling to get the plane out
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of the gate on time. Bethune, whose back was to the agent, heard him say, “Excuse me, sir, you’ll have to sit down. The plane has to leave.” The flight attendant became upset and said to the agent, “Do you know who that is? That’s Mr. Bethune!” The agent responded, “That’s very nice, but we gotta go. Tell him to sit down.” Bethune said that this “is how Continental Airlines stays on time—and how it has changed for the better.”81
4.3 Change Tools and Techniques
results-driven change Change created quickly by focusing on the measurement and improvement of results.
Exhibit 7.9
Imagine that your boss came to you and said, “All right, genius, you wanted it. You’re in charge of turning around the division.” How would you start? Where would you begin? How would you encourage change-resistant managers to change? What would you do to include others in the change process? How would you get the change process off to a quick start? Finally, what long-term approach would you use to promote long-term effectiveness and performance? Results-driven change, the General Electric workout, transition management teams, and organizational development are different change tools and techniques that can be used to address these issues. One of the reasons that organizational change efforts fail is that they are activity oriented, meaning that they focus primarily on changing company procedures, management philosophy, or employee behavior. Typically, there is much buildup and preparation as consultants are brought in, presentations are made, books are read, and employees and managers are trained. There’s a tremendous emphasis on “doing things the new way.” But, with all the focus on activities, on “doing,” almost no attention is paid to results, to seeing if all this activity has actually made a difference. By contrast, results-driven change supplants the emphasis on activity with a laser-like focus on quickly measuring and improving results.82 For example, at Monarch Marking Systems, quality-assurance engineer Steve Schneider guided the company’s results-driven change process by first identifying everything in Monarch’s factory that could be measured easily. He found 162 measures in all.83 He further emphasized the importance of quick results by declaring that problem-solving teams had only 30 days to solve a particular problem. He encouraged workers to get to it, saying, “It’s a project, not a process.” Another advantage of results-driven change is that managers introduce changes in procedures, philosophy, or behavior only if they are likely to improve measured performance. In other words, managers and workers actually test to see if changes make a difference. Consistent with this approach, Schneider announced that Monarch’s problem-solving teams could make any permanent changes they wanted, as long as those changes improved one of the 162 different measures of performance. A third advantage of results-driven change is that quick, visible improvements motivate employees to continue to make additional changes to improve measured performance. For example, one team at Monarch used cross-training to reduce the number of job categories from 120 to 32. Another, encouraged by the success of 90 other problem-solving
Results-Driven Change Programs
1. 2. 3. 4. 5. 6.
Management should create measurable, short-term goals to improve performance. Management should use action steps only if they are likely to improve measured performance. Management should stress the importance of immediate improvements. Consultants and staffers should help managers and employees achieve quick improvements in performance. Managers and employees should test action steps to see if they actually yield improvements. Action steps that don’t should be discarded. It takes few resources to get results-driven change started.
Source: R. H. Schaffer & H. A. Thomson, J.D, “Successful Change Programs Begin with Results,” Harvard Business Review on Change (Boston: Harvard Business School Press, 1998), 189–213.
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teams, trained machine operators to enter production data directly into the computer on the factory floor, eliminating the 7,600 hours of staff work required to enter those data from paper records. As at Monarch, the quick successes associated with results-driven change can be particularly effective at reducing resistance to change. Exhibit 7.9 describes the basic steps of resultsdriven change. The General Electric workout is a special kind of results-driven change. It is a three-day meeting that brings together managers and employees from different levels and parts of an organization to quickly generate and act on solutions to specific business problems.84 On the first morning of a workout, the boss discusses the agenda and targets specific business problems that the group is to try to solve. Then, the boss leaves, and an outside facilitator breaks the group, typically 30 to 40 people, into five or six teams and helps them spend the next day and a half discussing and debating solutions. On day three, in what GE calls a “town meeting,” the teams present specific solutions to their boss, who has been gone since day one. As each team’s spokesperson makes specific suggestions, the boss has only three options: agree on the spot, say no, or ask for more information so that a decision can be made by a specific, agreed-on date. GE boss Amand Lauzon sweated his way through a town meeting. To encourage him to say yes, his workers set up the meeting room so that Lauzon couldn’t make eye contact with his boss. He said, “I was wringing wet within half an hour. They had 108 proposals, I had about a minute to say yes or no to each one, and I couldn’t make eye contact with my boss without turning around, which would show everyone in the room that I was chicken.”85 In the end, Lauzon agreed to all but eight suggestions. Furthermore, once those decisions were made, no one at GE was allowed to overrule them. While the GE workout clearly speeds up change, it may also fragment change, if different managers approve conflicting suggestions in separate town meetings across a company. By contrast, a transition management team provides a way to coordinate change throughout an organization. A transition management team (TMT) is a team of 8 to 12 people whose full-time job is to manage and coordinate a company’s change process.86 One member of the TMT is assigned to anticipate and manage the emotions and behaviors related to resistance to change. Despite their importance, many companies overlook the impact that negative emotions and resistant behaviors can have on the change process. TMTs report to the CEO every day, decide which change projects are approved and funded, select and evaluate the people in charge of different change projects, and make sure that different change projects complement one another. For example, when FleetBoston Financial merged with Bank of America (BoA), a TMT was used to quickly implement six sigma quality programs (see Chapter 18 for an explanation) throughout the entire merged organization. Six sigma programs, which eliminate mistakes and improve quality, had already saved BoA $2 billion by cutting the time required to open a new branch from 500 to 350 days, reducing the number of ATM and deposit errors by 88 percent, and cutting the response time on individual retirement accounts from three days to 10 minutes. Since BoA had been using six sigma for four years and FleetBoston for just two, the goal of the TMT was to ensure that the six sigma programs for FleetBoston’s half of the merged company would catch up as quickly as possible. The team accomplished this by assigning a six
General Electric workout A three-day meeting in which managers and employees from different levels and parts of an organization quickly generate and act on solutions to specific business problems.
transition management team (TMT) A team of 8 to 12 people whose fulltime job is to manage and coordinate a company’s change process.
Transition management teams helped Bank of America better integrate Six Sigma practices at its acquisition of Fleet Boston. TMTs helped the company save money by cutting the number of days it takes to open a new branch from 500 to 350 days.
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sigma expert from BoA to each of FleetBoston’s key lines of business. Jim Buchanan, who is in charge of the team, said, “We expect that within two years Fleet will be caught up.” It is also important to say what a TMT is not. A TMT is not an extra layer of management further separating upper management from lower managers and employees. A TMT is not a steering committee that creates plans for others to carry out. Instead, the members of the TMT are fully involved with making change happen on a daily basis. Furthermore, it’s not the TMT’s job to determine how and why the company will change. That responsibility belongs to the CEO and upper management. Finally, a TMT is not permanent. Once the company has successfully changed, the TMT is disbanded. Indeed, Bank of America won’t need a TMT any more once everyone in the merged companies has been trained in six sigma practices. Exhibit 7.10 lists the primary responsibilities of TMTs. Exhibit 7.10 Primary Responsibilities of Transition Management Teams
1. 2. 3. 4. 5. 6. 7. 8.
Establish a context for change and provide guidance. Stimulate conversation. Provide appropriate resources. Coordinate and align projects. Ensure congruence of messages, activities, policies, and behaviors. Provide opportunities for joint creation. Anticipate, identify, and address people problems. Prepare the critical mass.
Source: J. D. Duck, “Managing Change: The Art of Balancing,” Harvard Business Review on Change (Boston: Harvard Business School Press, 1998), 55–81.
organizational development A philosophy and collection of planned change interventions designed to improve an organization’s long-term health and performance.
change agent The person formally in charge of guiding a change effort.
Exhibit 7.11
Organizational development is a philosophy and collection of planned change interventions designed to improve an organization’s long-term health and performance. Organizational development takes a long-range approach to change; assumes that top management support is necessary for change to succeed; creates change by educating workers and managers to change ideas, beliefs, and behaviors so that problems can be solved in new ways; and emphasizes employee participation in diagnosing, solving, and evaluating problems.87 As shown in Exhibit 7.11, organizational development interventions begin with the recognition of a problem. Then, the company designates a change agent to be formally in charge of guiding the change effort. This person can be someone from the company or a professional consultant. The change agent clarifies the problem, gathers information, works with decision makers to create and
General Steps for Organizational Development Interventions
1. Entry
A problem is discovered and the need for change becomes apparent. A search begins for someone to deal with the problem and facilitate change. 2. Startup A change agent enters the picture and works to clarify the problem and gain commitment to a change effort. 3. Assessment & feedback The change agent gathers information about the problem and provides feedback about it to decision makers and those affected by it. 4. Action planning The change agent works with decision makers to develop an action plan. 5. Intervention The action plan, or organizational development intervention, is carried out. 6. Evaluation The change agent helps decision makers assess the effectiveness of the intervention. 7. Adoption Organizational members accept ownership and responsibility for the change, which is then carried out through the entire organization. 8. Separation The change agent leaves the organization after first ensuring that the change intervention will continue to work.
Source: W. J. Rothwell, R. Sullivan, & G. M. McLean, Practicing Organizational Development: A Guide for Consultants (San Diego: Pfeiffer & Co., 1995).
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implement an action plan, helps to evaluate the plan’s effectiveness, implements the plan throughout the company, and then leaves (if from outside the company) after making sure the change intervention will continue to work. For example, change agent Hajime Oba is one of the key reasons that Toyota cars are tops in quality and reliability. Oba’s job is to work closely with Toyota suppliers, showing them how to increase quality and decrease costs. For example, Michigan Summit Polymers installed a $280,000 paint system with robots and a paint oven to bake paint onto the dashboard vents that went into Toyota cars, but Oba showed that a $12 hair dryer did the job better and faster (3 minutes versus 90 minutes for the robots and paint oven). Because of Oba’s demonstration, Summit replaced the robots with simple but effective $150 spray guns and the paint oven with intense light bulbs. Overall, Oba has helped Summit cut its defects from 3,000 parts per million to less than 60 parts per million.88 Oba’s efforts as a change agent have significantly improved the quality of parts at Toyota’s other suppliers as well. That, in turn, has helped Toyota reach the top of the quality rankings issued by J. D. Power & Associates and Consumer Reports magazine.89 Organizational development interventions are aimed at changing large systems, small groups, or people.90 More specifically, the purpose of large system interventions is to change the character and performance of an organization, business unit, or department. Small group intervention focuses on assessing how a group functions and helping it work more effectively to accomplish its goals. Person-focused intervention is intended to increase interpersonal effectiveness by helping people become aware of their attitudes and behaviors and acquire new skills and knowledge. Exhibit 7.12 describes the most frequently used organizational development interventions for large systems, small groups, and people. For additional information about changing systems, groups, and people, see the “What Really Works” feature on the next page.
Review 4: Managing Change The basic change process is unfreezing, change, and refreezing. Resistance to change, which stems from self-interest, misunderstanding and distrust, and a general intolerance for change, can be managed through education and communication, participation, negotiation, top management support, and coercion. Knowing what not to do is as important as knowing what to do to achieve successful change. Managers should avoid these errors when leading change: not establishing urgency, not creating a guiding coalition, lacking a vision, Exhibit 7.12 Different Kinds of Organizational Development Interventions LARGE SYSTEM INVTERVENTIONS
Sociotechnical systems Survey feedback
Team building Unit goal setting
An intervention designed to improve how well employees use and adjust to the work technology used in an organization. An intervention that uses surveys to collect information from the members, reports the results of that survey to the members, and then uses those results to develop action plans for improvement. SMALL GROUP INTERVENTIONS An intervention designed to increase the cohesion and cooperation of work group members. An intervention designed to help a work group establish short- and long-term goals. PERSON-FOCUSED INTERVENTIONS
Counseling/coaching Training
An intervention designed so that a formal helper or coach listens to managers or employees and advises them on how to deal with work or interpersonal problems. An intervention designed to provide individuals with the knowledge, skills, or attitudes they need to become more effective at their jobs.
Source: W. J. Rothwell, R. Sullivan, & G. M. McLean, Practicing Organizational Development: A Guide for Consultants (San Diego: Pfeiffer & Co., 1995).
W H A T
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Change the Work Setting or Change the People? Do Both! Let’s assume that you believe that your company needs to change. Congratulations! Just recognizing the need for change puts you ahead of 80 percent of the companies in your industry. But now that you’ve recognized the need for change, how do you make change happen? Should you focus on changing the work setting or the behavior of the people who work in that setting? It’s a classic chicken or egg type of question. Which would you do? A recent meta-analysis based on 52 studies and a combined total of 29,611 study participants indicated that it’s probably best to do both! CHANGING THE WORK SETTING
An organizational work setting has four parts: organizing arrangements (control and reward systems, organizational structure), social factors (people, culture, patterns of interaction), technology (how inputs are transformed into outputs), and the physical setting (the actual physical space in which people work). Overall, there is a 55 percent chance that organizational change efforts will successfully bring changes to a company’s work setting. Although the odds are 55–45 in your favor, this is a much lower probability of success than you’ve seen with the management techniques discussed in other chapters. This simply reflects how strong resistance to change is in most companies. Probability of Success 10%
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people make. Change the activities they perform. Change the information they share with others. And change the initiatives they take on their own. Change these individual behaviors and collectively you change the entire company. Overall, there is a 57 percent chance that organizational change efforts will successfully change people’s individual work behavior. If you’re wondering why the odds aren’t higher, consider how difficult it is to change personal behavior. It’s incredibly difficult to quit smoking, change your diet, or maintain a daily exercise program. Not surprisingly, changing personal behavior at work is also difficult. Thus, viewed in this context, a 57 percent chance of success is a notable achievement. Probability of Success 10%
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CHANGING INDIVIDUAL BEHAVIOR AND ORGANIZATIONAL PERFORMANCE
The point of changing individual behavior is to improve organizational performance (i.e., increase profits, market share, and productivity, and lower costs). Overall, there is a 76 percent chance that changes in individual behavior will produce changes in organizational outcomes. So, if you want to improve your company’s profits, market share, or productivity, focus on changing the way that your people behave at work.91
probability of success 55%
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CHANGING THE PEOPLE
Changing people means changing individual work behavior. The idea is powerful. Change the decisions
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undercommunicating the vision, not removing obstacles to the vision, not creating short-term wins, declaring victory too soon, and not anchoring changes in the corporation’s culture. Finally, managers can use a number of change techniques. Results-driven change and the GE workout reduce resistance to change by getting change efforts off to a fast start. Transition management teams, which manage a company’s change process, coordinate change efforts throughout an organization. Organizational development is a collection of planned change interventions (large system, small group, person-focused), guided by a change agent, that are designed to improve an organization’s long-term health and performance.
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Key Terms change agent, 228 change forces, 220 change intervention, 221 coercion, 223 compression approach to innovation, 216 creative work environments, 212 creativity, 204 design competition, 209 design iteration, 214 discontinuous change, 209 dominant design, 210 experiential approach to innovation, 214
flow, 212 General Electric workout, 227 generational change, 217 incremental change, 211 innovation streams, 208 milestones, 215 multifunctional teams, 215 organizational change, 204 organizational decline, 219 organizational development, 228 organizational innovation, 204 product prototype, 214 refreezing, 221 resistance forces, 221
resistance to change, 221 results-driven change, 226 S-curve pattern of innovation, 206 technological discontinuity, 208 technological lockout, 210 technological substitution, 209 technology cycle, 206 testing, 214 transition management team (TMT), 227 unfreezing, 221
Concept Check 1. What is the relationship between technology cycles and the S-curve pattern of innovation? 2. Explain why innovation matters to companies. 3. Describe innovation streams. 4. How can companies create creative work environments? 5. What is the difference between incremental change and discontinuous change?
6. Compare the experiential approach to managing innovation to the compression approach. 7. How do change forces work to bring about change? How do resistance forces work against change? 8. How can companies manage resistance to change? 9. What mistakes do managers commonly make when leading change? 10. List and describe the four main change tools and techniques that managers use.
Self-Assessment MIND-BENDERS Innovation is a key to corporate success. Companies that innovate and embrace the changes in their business environment tend to outperform those that stand still. Even so, innovative companies don’t simply rely on the creativity of their own workforce. They often contract with outside providers to generate new ideas for everything from operations to new products. In other words, innovative companies fill gaps in their own creativity by looking outside the organization.
As a manager, you will benefit from understanding how you are creative (not if you are creative). And just as important as your own creativity is your attitude toward creative endeavors. The Self-Assessment Appendix has a questionnaire that can give you insights into your own perspectives on innovation and creativity, which will form a baseline for you as you develop your managerial skills. Turn to page 617 and get started!
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Management Decision TOLL HOUSE—STRENGTHENING A CHIPPED BRAND Ever since 1930, when Ruth Wakefield, proprietor of the Toll House Inn, in Whitman, Massachusetts, assumed chunks of a Nestlé Semi-Sweet Chocolate Bar would melt evenly in the batter of her Butter Drop Do cookies, chocolate chip cookies have been a staple of the American diet.92 Wakefield’s failed experiment for chocolate cookies soon became famous, and in 1939, Nestlé introduced the tiny morsels we know today. Seventy-some years later, however, Nestlé is no longer a simple chocolate manufacturer, and Toll House is not the only chocolate chip cookie on the block. With Wakefield’s recipe on every bag, anyone can bake what most people consider the best chocolate chip cookies around, but a cook who saves the recipe can use a competitor’s chips, like Hershey or Ghirardelli. To make matters worse, not many people make cookies from scratch anymore except during the holidays. In a way, Nestlé has lost some control over the Toll House brand. Nestlé’s FoodServices Division hopes to combat this brand weakness with Vision 2010, a 10-year strategic growth plan designed to grow a company already valued at $800 million. The Nestlé Baking Group (NBG), the division responsible for Toll House, might have the toughest time contributing to the company’s growth goals. In an attempt to bolster its sales and reach, the NBG worked on making cookie baking more convenient. The result was the innovation of break-and-bake refrigerated dough. Pillsbury soon followed with its
own version, and now Pillsbury and Toll House are fierce competitors in refrigerated dough. But Toll House also faces competition from products other than refrigerated dough. The NBG also competes with companies like Kellogg that make snacks you can eat on the run (like the new break-apart Pop Tarts and prepackaged Rice Krispie Treats). Prepackaged snack food is everywhere, and now even break-and-bake dough seems less convenient than it did when the NBG invented it. Questions 1. Consider the above scenario. Plot Toll House products and innovations on the diagram of technology cycles in by Exhibit 7.4. 2. Does the Nestlé Baking Group need to take an experiential or compression approach to managing innovation? Base your answer on the scenario and your work from question 1. 3. Using the approach you selected in question 2— experiential or compression—generate as many ideas as you can with the goal of getting Toll House out of its break-and-bake rut. Note that your decision from question 2 will determine how you approach this question—whether you are looking for a breakthrough or for a slew of incremental changes. You may wish to consider new flavors, new packaging, new distribution channels—anything that can help the NBG reach its Vision 2010 goal of increased sales and stronger branding.
Management Team Decision BRUSHING UP AT COLGATE Ever since Procter & Gamble merged with Gillette, your phone has been ringing off the hook from investment bankers wanting your company to make a deal with Alberto-Culver, S.C. Johnson, Reckitt-Benckiser, or Clorox, and today is no exception.93 The management team has assembled to listen to yet another set of bankers outline some grandiose proposal. You’ve got another plan for Colgate, however, and it doesn’t involve a big acquisition. Quite the opposite, in fact. For the first time in nearly a decade, Colgate’s earnings shrank last quarter (by 10 percent), and you are planning to cut 4,400 jobs, restructure the company, and save $300 million in the process. Colgate’s problems are no secret. In a decades-long tug-of-war, P&G has regained the edge thanks to its
innovation machine. In the last five years, P&G has aggressively expanded in the oral care markets where it competes most heavily with Colgate. New flavors of Crest, whitening toothpastes, Crest Whitestrips, SpinBrush, and a licensing arrangement with W.L. Gore for Glide floss have all helped Crest reemerge as the leader in the markets it serves. Colgate’s most recent innovations—Colgate Total, Motion and Actibrush electric toothbrushes, and Simply White tooth whitener — are now either fading memories or also-rans. And even though Colgate has a strong reputation as a reliable brand, it has been slow to develop new products for developing and existing markets. Perhaps it’s just gunshy. The company’s most aggressive innovation was the tooth-whitening system Simply White. Regardless of the product’s quality, the bottle and applicator looked like
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Liquid Paper and proved no match for P&G’s Crest Whitestrips. After that near debacle, Colgate managers apparently decided that going for big hits wasn’t a workable strategy. So, the company seems to be playing catch-up to P&G and GlaxoSmithKline, a new competitor in the oral care market. In fact, in a recent year, P&G spent $229 million on its toothpaste and tooth-whitening products; Colgate spent only $80 million. Innovation isn’t the only area where Colgate has failed to invest. The company’s annual ad budget of $1 billion pales in comparison to the $5 billion P&G spends each year to promote its consumer products. Heavy spending has helped P&G capture 51 percent of unit sales and 70 percent of dollar sales in the toothwhitening segment. Colgate weighs in with 21 percent and 10 percent, respectively. P&G’s innovative approach to advertising has helped catapult its products to the forefront of consumers’ minds. For example, advertising and sales for Whitestrips began on the Web, where the demand was overwhelming. Once the product was rolled out on the market, the day after Colgate’s Simply White, P&G had a blockbuster. Simply White hit the shelves and stayed there. After hanging up from yet another conference call with investment bankers urging your management team
to consider a merger, you lean back in your chair and look around the table. “I think we all know what we’re not going to do,” you begin cautiously. “The real question is what we are going to do. Now that we have announced measures to conserve resources, we need to decide how to invest what we save.” For this exercise, assemble a team of four to five students to play the role of the management team at Colgate. Questions 1. Is innovation really necessary at Colgate? In other words, in a market saturated with innovation, is there something to be said for the “keep it simple” approach? Explain. 2. Do you use the $300 million saved from operational cuts to fund innovation, or do you use the money to better market current products? 3. Where do you suggest Colgate look for sources of innovation? 4. As Colgate begins implementing a new innovation strategy, do you recommend that the company follow a compression approach to innovation or an experiential approach? Why?
Develop Your Career Potential SPARK YOUR OWN CREATIVITY Creativity is a vital part of every organization—and not just the whiz-bang, multimillion-dollar type of creativity.94 Even banal tasks can benefit from a new approach: an office assistant may think creatively about how to manage the company’s filing system or figure out a simple way to keep track of who is in and out of the office. A Chicago company called Inventables has developed innovation kits—boxes containing disparate items to spark creativity—which it sells to clients like Procter & Gamble and Motorola four times a year. The idea is that designers and engineers will be inspired by tinkering with the contents of the kits. You don’t need Inventables to become inspired, however. Nor do you have to wait for your company to develop a creative work environment before you can become creative. You can spark your own creativity and think “outside the box” on your own. A Cincinnati-based company called Eureka Ranch uses toys to help adults remember how to be imaginative, and its long client list of Fortune 500 companies is a testament to founder Doug Hall’s methods. Another company,
Mindware, specializes in educational activities and toys that can help adults regain access to their imaginations. Just looking through its catalog of erector sets, science sets, puzzle books, strategy games, and tangrams may be enough to get your juices flowing. Activities 1. Visit http://www.eurekaranch.com and listen to the audio clip of what the company does and how it does it. What do you think of the three dimensions of creativity? 2. At the Eureka Ranch Web site, visit the page on Brain Brew. What is Brain Brew Radio? Is it available in your area? If it is, consider listening to it once a month to hear the creative ideas that people across the country are working on. 3. Visit http://www.mindwareonline.com and peruse some of the products the company sells. Which products do you find most appealing? If it's in your budget, order one of the items as a tool to help you develop and refine your creative side.
Take Two
Biz Flix October Sky
The movie October Sky is based on the autobiographical book Rocket Boys by Homer Hickam. An all-star cast is led by Jake Gyllenhaal, who plays Homer Hickam. As a teenager, Homer is facing a dreary future as a coal-miner until he sees the Soviet satellite Sputnik pass over his small mining town of Coalwood, West Virginia. A new interest in rockets infects Homer, who begins to experiment with model rockets in the summer of 1957. Soon, Homer has convinced several of his friends to join him in designing a rocket to enter in the National Science Fair, where they hope to win college scholarships as a result. What to Watch for and Ask Yourself
1. Are Homer and his friends working toward discontinuous change or incremental change? Explain. 2. Which approach to innovation best describes what the “Rocket Boys” are doing? Identify the elements of the approach you choose that are evident in the clip.
Management Workplace Ziba Designs
Do you ever wonder who designs all the gadgets and gizmos you see and use everyday? Ziba Design, one of the most renowned industrial design companies, is based in Portland, Oregon; it was started by Sohrab Vossoughi, an Iranian immigrant, more than 20 years ago. No industrial design firm in the world has won as many awards per employee as Ziba, which has won as many as four prestigious awards in one year. Ziba’s success is a tribute to the culture of innovation nurtured by its founder. What to Watch for and Ask Yourself
1. Describe the elements of Ziba’s creative work environment. 2. In what ways does Ziba use an experiential approach to innovation? In what ways does the company use a compression approach? 3. Based on what you saw in the video, how well do you think Ziba manages change?
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Global Management
C H A P T E R
O U T L I N E
Chapter8 What Would You Do? What Is Global Business? 1. Global Business, Trade Rules, and Trade Agreements 1.1 1.2 1.3 1.4
The Impact of Global Business Trade Barriers Trade Agreements Consumers, Trade Barriers, and Trade Agreements
How to Go Global? 2. Consistency or Adaptation? 3. Forms for Global Business 3.1 3.2 3.3 3.4
Exporting Cooperative Contracts Strategic Alliances Wholly Owned Affiliates (Build or Buy) 3.5 Global New Ventures
Where to Go Global? 4. Finding the Best Business Climate
4.1 Growing Markets 4.2 Choosing an Office/Manufacturing Location 4.3 Minimizing Political Risk
5. Becoming Aware of Cultural Differences 6. Preparing for an International Assignment 6.1 Language and Cross-Cultural Training 6.2 Spouse, Family, and DualCareer Issues
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise
Xtra! One exhibit worksheet, author FAQs, quiz, Management News, and video clips from the chapter with exercises Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
MTV International Headquarters, London, England.1 As a child of the 1980s, you can’t get the words from that Dire Straits song out of your head, “I want my, I want my, I want my MTV.” You grew up on MTV. But, then, who didn’t? MTV and its sister station, VH1, revolutionized the music business and pioneered some of the first TV reality shows (The Real World, The Osbournes, etc.). In the early 1990s, MTV created an international division, MTV International, to take MTV to the rest of the world. The initial format was simple: hire local English-speaking VJs (video disc jockeys) and have them talk in between introducing Western videos (e.g., The Police and Phil Collins). The only problem? The format didn’t work. Divya Gupta, president of Media Edge, which helps companies buy advertising in India, said, “MTV, when it first entered the country [India], made the mistake of coming in as MTV. No changes. They didn’t go anywhere.” Though the world’s youth clamored for Western artists and videos, they also wanted to see and hear artists from their own countries. The difficulty with adding local programming, however, is that while the international youth TV market is huge, industry revenues are low, costs are high, and competition is intense. Though MTV can command tens of thousands of dollars for a 30-second commercial in the United States, it gets only $175 to $250 per commercial in developing markets like India. If MTV buys or creates local broadcasting facilities in each major market or country, develops local programming (which can cost from $200,000 to $350,000 per half-hour), hires local VJs with whom local viewers will connect, and finds and sells to local, lower-paying advertisers, it will basically end up duplicating itself at very
What Would You Do?
high costs in each of the markets it enters. Finally, MTV International faces incredible competition across the globe. For example, in the United Kingdom, MTV UK battles with Emap Performance Television, whose seven music television channels are just as popular as MTV UK. In India, where most households have only one TV and families tend to watch TV shows together, MTV must compete with soap operas, sports, and news as well as with numerous alternative national and regional music channels. With the entire family sitting around the TV set, popular shows like Pimp My Ride, Punk’d, and MTV Spring Break, which appeal to Western youths, are unlikely to help MTV gain viewers in more conservative India. Yet, with the number of people worldwide between the ages of 10 and 34 expected to reach 2.3 billion by 2010, the number of low-income families purchasing TVs in China, Brazil, Russia, and India, growing exponentially, and only 62 percent of the population outside the United States having cable or satellite TV, MTV International has tremendous opportunities for growth. The question is how? Should MTV International be consistent across STUDY TIP countries, or should it be completely different in each Review your class notes. Do culture? How should MTV Interthey give you enough national expand internationinformation? Do they give you ally? Should it license its MTV the right information? If not, brand to local businesses in visit your campus study each area, form strategic alliances with key foreign busicenter to learn how to take ness partners, or bear the risk good notes. itself and wholly own and control each MTV station throughout the world? Finally, deciding where to take your company global is always an important decision. But, with so many good foreign markets to enter, the question for MTV International isn’t where to expand, but how it can expand successfully in so many different places at the same time. If you were in charge of MTV International, what would you do?
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MTV’s struggle with international expansion is an example of the key issue in global business: How can you be sure that the way you run your business in one country is the right way to run that business in another? This chapter discusses how organizations make those decisions. We will start by examining global business in two ways: first, by exploring its impact on U.S. businesses, and then, by reviewing the basic rules and agreements that govern global trade. Next, we will examine how and when companies go global by examining the tradeoff between consistency and adaptation and by discussing how to organize a global company. Finally, we will look at how companies decide where to expand globally. Here, we will examine how to find the best business climate, how to adapt to cultural differences, and how to better prepare employees for international assignments.
What Is Global Business? global business The buying and selling of goods and services by people from different countries.
Business is the buying and selling of goods or services. Buying this textbook was a business transaction. So was selling your first car. So was getting paid for babysitting or for mowing lawns. Global business is the buying and selling of goods and services by people from different countries. The Timex watch on my wrist as I write this chapter was purchased at a Wal-Mart in Texas. But since it was made in the Philippines, I participated in global business when I wrote Wal-Mart a check. Wal-Mart, in turn, had already paid Timex, which had paid the company that employs the Filipino managers and workers who made my watch. Of course, there is more to global business than buying imported products at WalMart. After reading the next section, you should be able to 1 discuss the impact of global business and the trade rules and agreements that govern it. 1
GLOBAL BUSINESS, TRADE RULES, AND TRADE AGREEMENTS
If you want a simple demonstration of the impact of global business, look at the tag on your shirt, the inside of your shoes, and the inside of your cell phone (take your battery out). Chances are, all of these items were made in different places around the world. As I write this, my shirt, shoes, and cell phone were made in Thailand, China, and Korea. Where were yours made?
HONDA OF AMERICA MANUFACTURING, INC.
Although the United States imports products from around the world, the country of origin of some may surprise you. Many Japanese automakers have manufacturing facilities in the United States, like Honda’s plant in Marysville, Ohio, and Toyota’s plant in Georgetown, Kentucky.
Let’s learn more about 1.1 the impact of global business, 1.2 how tariff and nontariff trade barriers have historically restricted global business, 1.3 how today global and regional trade agreements are reducing those trade barriers worldwide, and 1.4 how consumers are responding to those changes in trade rules and agreements.
1.1 The Impact of Global Business Thomas Friedman, author and New York Times columnist, observed global business in action when he visited Infosys, a consulting and information technology company, in India: I guess the eureka moment came on a visit to the campus of Infosys Technologies, one of the crown jewels of the Indian outsourcing and software industry. Nandan Nilekani, the Infosys C.E.O.,
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was showing me his global video-conference room, pointing with pride to a wall-size flat-screen TV, which he said was the biggest in Asia. Infosys, he explained, could hold a virtual meeting of the key players from its entire global supply chain for any project at any time on that supersize screen. So its American designers could be on the screen speaking with their Indian software writers and their Asian manufacturers all at once. That’s what globalization is all about today, Nilekani said. Above the screen there were eight clocks that pretty well summed up the Infosys workday: 24/7/365. The clocks were labeled United States West, United States East, G.M.T., India, Singapore, Hong Kong, Japan, Australia.2 Infosys does global business by selling products and services worldwide with managers and employees from different continents working together as seamlessly as if they were next door to each other. But Infosys isn’t unique. There are thousands of other multinational companies just like it. Multinational corporations are corporations that own businesses in two or multinational corporation more countries. In 1970, more than half of the world’s 7,000 multinational cor- A corporation that owns businesses in porations were headquartered in just two countries: the United States and the two or more countries. United Kingdom. Today, there are 61,582 multinational corporations, nearly nine times as many as in 1970, and only 3,235, or 5.3 percent, are based in the United States.3 Today, 41,842 multinationals, or 67.9 percent, are based in other developed countries (e.g., Germany, Italy, Canada, Japan), while 14,192, or 23 percent, are based in developing countries (e.g., Colombia, South Africa, and Tunisia). So, today, multinational companies can be found by the thou- direct foreign investment A method of investment in which a sands all over the world! company builds a new business or Another way to appreciate the impact of global business is by considering buys an existing business in a foreign direct foreign investment. Direct foreign investment occurs when a company country. builds a new business or buys an existing business in a foreign country. Brazilian steelmaker Gerdau SA made a direct foreign investment when it began purchasing U.S. steel companies such as International Steel Group. Over the last five years, these U.S. acquisitions have made Gerdau SA the fourth largest Exhibit 8.1 steelmaker in the United States and the sixteenth largest in the world.4 Average Direct Foreign Investment in the United States, 2000–2004 Of course, companies from many other countries also own businesses in the United States. As Exhibit 8.1 shows, companies from United Kingdom 31,356 the United Kingdom, Germany, France, Germany 14,374 Canada, and the Netherlands have the largest direct foreign investment in the United States. France 13,797 Japanese companies, which popular opinion typically puts at the top of this list, rank Canada 11,959 seventh. At the same time, direct foreign investment Netherlands 11,057 in the United States is just half the picture. U.S. Switzerland 7,284 companies also have made large direct foreign investments in countries throughout the world. Japan 6,691 For example, Anheuser-Busch, the brewer of Budweiser Beer, paid $700 million to acquire In 2004, investment Luxembourg 5,446 coming into the United Harbin Brewery Group, the fourth largest beer States rose to $106.8 5 company in China. As Exhibit 8.2 shows, U.S. billion, up from $67.1 Ireland 1,299 billion in 2003. companies have made their largest direct Bermuda 488 foreign investments in the United Kingdom, Canada, the Netherlands, Luxembourg, 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Switzerland, Mexico, Ireland, and Germany. Overall, direct foreign investment throughDollars (Millions) out the world is typically around $1 trillion Source: International Investment Data, Bureau of Economic Analysis, [Online] available at per year!6 So, whether foreign companies in- http://www.bea.doc.gov/bea/di/fdi21web.xls, 21 April 2005; J. Schuman, “U.S. Still Dominates as vest in the United States or U.S. companies Global Investor,“ Wall Street Journal, 24 June 2005, online.
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United Kingdom
21,345
Canada Netherlands
invest abroad, direct foreign investment is an increasingly important and common method of conducting global business.
16,225 11,532
1.2 Trade Barriers
Although today’s consumers usually don’t care where the products they buy come from (more 8,520 Switzerland on this in Section 1.4), national governments have traditionally preferred that consumers buy 7,536 Mexico domestically made products in hopes that such 7,203 Ireland purchases would increase the number of domes6,022 Germany tic businesses and workers. Indeed, governments have done much more than hope that 4,839 Singapore In 2004, the United you will buy from domestic companies. HistoriStates invested a 4,465 Japan cally, governments have actively used trade barrirecord $252 billion in foreign corporate to make it much more expensive or difficult ers 3,996 Bermuda assets! (or sometimes impossible) for consumers to buy Italy 3,528 or consume imported goods. For example, countries throughout the world restrict the 0 5,000 10,000 15,000 20,000 25,000 number and kind of imported television shows Dollars (Millions) and movies. The French government requires Source: International Accounts Data: United States Direct Investment Abroad, Bureau of Economic that 40 percent of all TV shows be French and Analysis, [Online] available at http://www.bea.doc.gov/bea/di/usdiacap.xls, 21 April 2005; that at least 60 percent be European; the J. Schuman, “U.S. Still Dominates as Global Investor,“ Wall Street Journal, 24 June 2005, online. Chinese government permits only 20 foreign Exhibit 8.2 films to be imported each year.7 Likewise, the Average U.S. Direct Foreign European Union places a 24 percent tax on tuna imported from the Philippines Investment Abroad, 2000–2004 and Thailand.8 And the U.S. government imposes a 93 percent duty on fireworks imported from China, effectively doubling their price.9 By establishing these restrictions and taxes, the European Union, and the French, Chinese, and U.S. trade barriers governments are engaging in protectionism, which is the use of trade barriers to proGovernment-imposed regulations tect local companies and their workers from foreign competition. that increase the cost and restrict the number of imported goods. Governments have used two general kinds of trade barriers: tariff and nontariff barriers. A tariff is a direct tax on imported goods. Like the U.S. government’s 93 percent duty on fireworks imported from China, tariffs protectionism A government’s use of trade barriers to increase the cost of imported goods relative to that of domestic goods. For shield domestic companies and their example, the U.S. import tax on trucks is 25 percent. This means that U.S. buyworkers from foreign competition. ers must pay $25,000 for a $20,000 imported truck, with the $5,000 tariff going to the U.S. government. As a result, less than 10,000 pickup trucks are imtariff ported by the United States each year.10 Nontariff barriers are nontax methods of A direct tax on imported goods. increasing the cost or reducing the volume of imported goods. There are five types of nontariff barriers: quotas, voluntary export restraints, government nontariff barriers import standards, government subsidies, and customs valuation/classification. BeNontax methods of increasing the cost cause there are so many different kinds of nontariff barriers, they can be an even or reducing the volume of imported goods. more potent method of shielding domestic industries from foreign competition. Quotas are specific limits on the number or volume of imported products. For example, because of strict import quotas, raw sugarcane imports into the United quota States are limited to approximately 1.2 million metric tons per year.11 Since this A limit on the number or volume is well below the demand for sugar in the United States, domestic U.S. sugar of imported products. prices are twice as high as sugar prices in the rest of the world.12 Like quotas, voluntary export restraints voluntary export restraints limit the amount of a product that can be imported Voluntarily imposed limits on the annually. The difference is that the exporting country, rather than the importing number or volume of products country, imposes restraints. Usually, however, the “voluntary” offer to limit exported to a particular country. exports occurs because the importing country has implicitly threatened to impose quotas. For example, to protect Japanese farmers from cheap and plentiful Chinese agricultural products, the Japanese government is trying to convince Luxembourg
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China to “voluntarily” restrict the amount of leeks, shitake mushrooms, and rushes (used in making Japanese floor mats) that it exports to Japan each year.13 According to the World Trade Organization (see the discussion in Section 1.3), however, voluntary export restraints are illegal and should have been phased out after 1999.14 In theory, government import standards are established to protect the health and safety of citizens. In reality, such standards are often used to restrict or ban imported goods. For example, Japan banned the importation of nearly all U.S. apples, which are one-third the cost of Japanese apples. Ostensibly, the ban was to prevent transmission of fire blight bacteria to Japanese apple orchards, but research conducted jointly by U.S. and Japanese scientists “does not support Japan’s assertion that mature, symptomless apples can transmit” the fire blight bacteria.15 In other words, the Japanese government was actually using this government import standard to protect the economic health of its apple farmers, rather than the biological health of its apple orchards. Only after the World Trade Organization (see Section 1.3) ruled that there was no scientific basis for the ban did Japan allow U.S. apples to be imported without restrictions.16 Many nations also use subsidies, such as long-term, low-interest loans, cash grants, and tax deferments, to develop and protect companies in special industries. European and Japanese governments have invested billions of dollars to develop airplane manufacturers and steel companies, while the U.S. government has provided subsidies for manufacturers of computer chips. Not surprisingly, businesses complain about unfair trade practices when other companies receive government subsidies. For example, German-based Infineon Technologies, which makes computer memory chips, is upset about the $4 billion in subsidies that state-run Korean banks have given to its Korean-based competitor Hynix Semiconductor to prevent it from going out of business. A spokesperson for Infineon complained, “With the decision that has been reached now [to subsidize Hynix], there is the threat of continuing unfair competition.”17 The last type of nontariff barrier is customs classification. As products are imported into a country, they are examined by customs agents, who must decide into which of nearly 9,000 categories they should classify a product (see the United States Official Harmonized Tariff Schedule at http://www.usitc.gov/ tata/hts/index.htm for more information). Classification is important because the category assigned by customs agents can greatly affect the size of the tariff and whether the item is subject to import quotas. For example, the U.S. Customs Service has several customs classifications for imported shoes. Tariffs on imported leather or “nonrubber” shoes are about 8.5 percent, whereas tariffs on imported rubber shoes, such as athletic footwear or waterproof shoes, range from 20 to 67 percent.18 The difference is large enough that some importers try to make their rubber shoes look like leather in hopes of receiving the nonrubber customs classification and lower tariff.
1.3 Trade Agreements Thanks to the trade barriers described above, buying imported goods has often been much more expensive and difficult than buying domestic goods. During the 1990s, however, the regulations governing global trade were transformed. The most significant change was that 124 countries agreed to adopt the General Agreement on Tariffs and Trade (GATT). Although GATT itself was replaced by the World Trade Organization (WTO) in 1995, the changes that it made continue to encourage international trade. Through tremendous decreases in tariff and nontariff barriers, GATT made it much easier and cheaper for consumers in all countries to buy foreign products. First tariffs were cut 40 percent on average worldwide by 2005. Second,
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government import standard A standard ostensibly established to protect the health and safety of citizens but, in reality, often used to restrict imports.
subsidies Government loans, grants, and tax deferments given to domestic companies to protect them from foreign competition.
customs classification A classification assigned to imported products by government officials that affects the size of a tariff and the imposition of import quotas.
General Agreement on Tariffs and Trade (GATT) A worldwide trade agreement that reduced and eliminated tariffs, limited government subsidies, and established protections for intellectual property.
World Trade Organization (WTO) As the successor to GATT, the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably, and freely as possible.
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tariffs were eliminated in 10 specific industries: beer, alcohol, construction equipment, FACT FILE farm machinery, furniture, medical equipment, paper, pharmaceuticals, steel, and toys. Third, stricter limits were put on government Location: Geneva, Switzerland Functions: subsidies. For example, GATT put limits on Established: 1 January 1995 • Administering WTO trade how much national governments can subsiCreated by: Uruguay Round agreements dize company research in electronic and negotiations (1986–1994) • Forum for trade negotiations high-technology industries (see the discusMembership: 148 countries • Handling trade disputes sion of subsidies in Section 1.2). Fourth, (as of 13 October 2004) • Monitoring national trade GATT established protections for intellectual Budget: 169 million Swiss policies property, such as trademarks, patents, and francs for 2005 • Technical assistance and Secretariat staff: 630 training for developing countries copyrights. Protection of intellectual propHead: Supachai Panitchpakdi • Cooperation with other erty has become an increasingly important (director-general) international organizations issue in global trade because of widespread product piracy. For example, 90 percent of the computer software and 95 percent of the video games in China are illegal pirated Source: “WTO: About the Organization,” World Trade Organization, [Online] available at copies.19 Likewise, Chinese bootleggers reguhttp://www.wto.org/english/thewto_e/thewto_e.htm, 21 April 2005. larly sell illegal DVD copies of movies, such Exhibit 8.3 as The Lord of the Rings, months before the movie studios release official World Trade Organization copies to stores in the United States.20 Product piracy like this costs movie companies $3 billion to $4 billion in lost revenue each year.21 Finally, trade disputes between countries now are fully settled by arbitration panels from the WTO. In the past, countries could use their veto power to cancel a panel’s decision. For instance, the French government routinely vetoed rulings that held that its large cash grants to French farmers constituted unfair subsidies. Now, however, countries that are members of the WTO (every country that agreed to GATT is a member) no longer have veto power. Thus, WTO rulings are complete and final. For more information about GATT and the WTO, go to the WTO’s Web site at http://www.wto.org. Exhibit 8.3 provides a brief overview of the WTO and its functions. The second major development that has reduced trade barriers has been the regional trading zones creation of regional trading zones, in which tariff and nontariff barriers are reAreas in which tariff and nontariff duced or eliminated for countries within the trading zone. The largest and most barriers on trade between countries important trading zones are in Europe (the Maastricht Treaty), North America are reduced or eliminated. (the North American Free Trade Agreement, or NAFTA), South America (the proposed Free Trade Area of the Americas, or FTAA), and Asia (the Association of Southeast Asian Nations, or ASEAN, and Asia-Pacific Economic Cooperation, or APEC). The map in Exhibit 8.4 shows the extent to which free trade agreements govern global trade. In 1992, Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom impleMaastricht Treaty of Europe mented the Maastricht Treaty of Europe. The purpose of this treaty was to transA regional trade agreement between form their 12 different economies and 12 currencies into one common economic most European countries. market, called the European Union (EU), with one common currency. Austria, Finland, and Sweden joined the EU in 1995, followed by Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia in 2004, bringing the total membership to 25 countries.22 Bulgaria, Croatia, Romania, and Turkey have since applied and are now being considered for membership.23 On 1 January 2002, a single common currency, the euro, went into circulation in 12 of the EU’s members (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain). Prior to the treaty, trucks carrying products were stopped and inspected by customs agents at each border. Furthermore, since the required paperwork, tariffs, and government product specifications could be radically different in
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Maastricht Treaty of Europe Austria, Belgium, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. ASEAN Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. APEC Australia, Canada, Chile, the People's Republic of China, Hong Kong (China), Japan, Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, the United States, and all members of ASEAN except Cambodia, Laos, and Myanmar.
NAFTA (North American Free Trade Agreement) United States, Canada, and Mexico. FTAA (Free Trade Area of the Americas) United States, Canada, Mexico, and all the countries in Central America and South America. CAFTA-DR (Central America-Dominian Republic Free Trade Agreement) Costa Rica, the Dominican Republic, El Salavador, Guatemala, Honduras, Nicaragua, and the United States.
each country, companies often had to file 12 different sets of paperwork, pay 12 different tariffs, produce 12 different versions of their basic product to meet various government specifications, and exchange money in 12 different currencies. Likewise, open business travel from state to state, which we take for granted in the United States, was complicated by inspections at each border crossing. If you lived in Germany, but worked in Luxembourg, your car was stopped and your passport was inspected twice every day, as you traveled to and from work. Also, every business transaction required a currency exchange, for example, from German deutsche marks to Italian lira, or from French francs to Dutch guilders. Imagine all of this happening to millions of trucks, cars, and businesspeople, and you can begin to appreciate the difficulty and cost of conducting business across Europe before the Maastricht Treaty. For more information about the Maastricht Treaty and the EU, go to http://europa.eu.int/index-en.htm. For more about Europe’s new common currency, the euro, see http://www.euro.ecb.int/en.html. NAFTA, the North American Free Trade Agreement between the United States, Canada, and Mexico, went into effect on 1 January 1994. More than any other regional trade agreement, NAFTA has liberalized trade between countries so that businesses can plan for one market, North America, rather than for three separate markets, the United States, Canada, and Mexico. One of NAFTA’s most important achievements was to eliminate most product tariffs and prevent Canada, the United States, and Mexico from increasing existing tariffs or introducing new ones. Before NAFTA, Wal-Mart used expensive intermediaries to distribute goods to its stores, and Mexican officials often pressured managers for bribes. Because of burdensome paperwork, deliveries sometimes took months to clear customs. This all changed with NAFTA. Before NAFTA,
Exhibit 8.4 Global Map of Regional Trade Agreements
NAFTA (North American Free Trade Agreement) A regional trade agreement between the United States, Canada, and Mexico.
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FTAA (Free Trade Area of the Americas) A regional trade agreement that, when signed, will create a regional trading zone encompassing 34 countries in North and South America.
CAFTA (Central America Free Trade Agreement) A regional trade agreement between Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States .
ASEAN (Association of Southeast Asian Nations) A regional trade agreement between Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.
APEC (Asia-Pacific Economic Cooperation) A regional trade agreement between Australia, Canada, Chile, the People’s Republic of China, Hong Kong, Japan, Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, the United States, and all the members of ASEAN, except Cambodia, Laos, and Myanmar.
Wal-Mart sold a Sony flat-screen TV imported from Japan with a 23 percent tariff for $1,600 in Mexico! After NAFTA, Sony built a new factory in Mexico, enabling it to ship the TVs duty-free anywhere in the United States, Canada, or Mexico. With shipping costs now next to nothing and the 23 percent tariff eliminated, Wal-Mart sells the flat-screen TVs for $600 in Mexico, or about what they sell for in the United States.24 Overall, both Mexican and Canadian exports to the United States have doubled since NAFTA went into effect. U.S. exports to Mexico and Canada have doubled, too, growing twice as fast as U.S. exports to any other part of the world.25 In fact, U.S. companies now export more to Mexico than to the United Kingdom, France, Germany, and Italy combined!26 For more information about NAFTA, see the Office of NAFTA & Inter-American Affairs at http://www. mac.doc.gov/nafta/. The goal of the proposed FTAA, the Free Trade Area of the Americas, is to establish a free trade zone similar to NAFTA throughout the Western Hemisphere. If created, the FTAA would likely supplant Mercosur, a free trade agreement between Brazil, Argentina, Uruguay, and Paraguay. The FTAA would then become the largest trading zone in the world, encompassing 800 million people in 34 countries in both North and South America with a combined gross domestic product of $11 trillion!27 Like NAFTA, the FTAA will support trade “without barriers, without subsidies, without unfair practices, and with an increasing stream of productive investments.”28 Over the next decade nontariff barriers will be removed, tariffs will gradually be reduced to zero, rules for investing and financial markets will be standardized, and a process for handling trade disputes will be established.29 For more information about the FTAA, see http:// www.ftaa-alca.org. For more information about Mercosur, see http://www.sice. oas.org/agreemts/Mercin_e.asp#MERCOSUR. Also see Exhibit 8.4 for information about CAFTA, the new Central America Free Trade Agreement between Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States, which went into effect in August 2005. ASEAN, the Association of Southeast Asian Nations, and APEC, the Asia-Pacific Economic Cooperation, are the two largest and most important regional trading groups in Asia. ASEAN is a trade agreement between Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, which form a market of more than 927 million people. U.S. trade with ASEAN countries exceeds $120 billion a year.30 In fact, the United States is ASEAN’s largest trading partner, and ASEAN’S member nations constitute the fifth largest trading partner of the United States. ASEAN’s members have agreed to create an ASEAN free trade area beginning in 2015 for the six original countries (Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, and Thailand) and in 2018 for the newer member countries (Cambodia, Laos, Myanmar, and Vietnam).31 For more information about ASEAN, see http://www.aseansec.org. APEC is a broader agreement that includes Australia, Canada, Chile, the People’s Republic of China, Hong Kong (China), Japan, Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, the United States, and all the members of ASEAN, except Cambodia, Laos, and Myanmar.32 APEC’s 21 member countries contain 2.6 billion people, account for 47 percent of all global trade, and have a combined gross domestic product of over $19 trillion.33 APEC countries began reducing trade barriers in 2000, though all the reductions will not be completely phased in until 2020. For more information about APEC, see http://www.apecsec.org.sg.
1.4 Consumers, Trade Barriers, and Trade Agreements In Tokyo, a Coke costs $1.89.34 In Geneva, Switzerland, a small cup of regular coffee costs $1.70. In the United States, each of these items costs about a dollar. A McDonald’s Big Mac sandwich costs an average of $2.90 in the United States,
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$3.37 in the United Kingdom, and $4.90 in Switzerland.35 Although not all products are more expensive in other countries (in some, they are cheaper; for example, a Big Mac costs $1.26 in China and $2.08 in Mexico), international studies find that American consumers get much more for their money than most other consumers in the world. For example, the average worker earns nearly $40,680 a year in Switzerland, $43,400 in Norway, $34,180 in Japan, and $37,870 in America.36 Yet, after adjusting these incomes for how much they can buy, the Swiss income is equivalent to just $32,220, the Norwegian income to $37,910, and the Japanese income to $28,450!37 This is the same as saying that $1 of income can buy you only 79 cents worth of goods in Switzerland, 87 cents worth in Norway, and 83 cents worth in Japan. In other words, Americans can buy much more with their incomes compared to those in other countries. One reason that Americans get more for their money is that the U.S. marketplace has been one of the easiest for foreign companies to enter. Although some U.S. industries, such as textiles, have been heavily protected from foreign competition by trade barriers, for the most part, American consumers (and businesses) have had plentiful choices among American-made and foreign-made products. More important, the high level of competition between foreign and domestic companies that creates these choices helps to keep prices low in the United States. Furthermore, it is precisely the lack of choice and the low level of competition that keep prices higher in countries that have not been as open to foreign companies and products. For example, Japanese trade barriers are estimated to cost Japanese consumers more than $100 billion a year. In fact, Japanese trade barriers amount to a 51 percent tax on food for the average Japanese family.38 So why do trade barriers and free trade agreements matter to consumers? They’re important because free trade agreements increase choices, competition, and purchasing power and thus decrease what people pay for for food, clothing, necessities, and luxuries. Accordingly, today’s consumers rarely care where their products and services come from. For example, Mark Sneed, president of Phillips Foods, which imports blue crab from its Asian processing factories at one-third the cost of crab caught and processed in the United States, says, “I’ve never once had a customer ask me if we served domestic or imported crabs, just like they never ask if we have foreign shrimp.”39 Peter Germano, a New York jeweler who sells diamonds, says people don’t care where the diamonds are from; they “just want to know which is cheaper.”40 Finally, Luis de Anda, who visits one of Wal-Mart’s Sam’s Wholesale Clubs in Mexico once a month to purchase diapers and toilet paper in bulk for his family and friends, says, “Why should I care where they’re from? With the money I save, I take my family to the movies.”41 And why do trade barriers and free trade agreements matter to managers? The reason, as you’re about to read, is that while free trade agreements create new business opportunities, they also intensify competition, and addressing that competition is a manager’s job.
Review 1: Global Business, Trade Rules, and Trade Agreements Today, there are more than 61,000 multinational corporations worldwide; just 5.3 percent are based in the United States. Global business affects the United States in two ways: through direct foreign investment in the United States by foreign companies, and through U.S. companies’ investment in business in other countries. Direct foreign investment throughout the world typically amounts to about $1 trillion per year. Historically, tariffs and nontariff trade barriers, such as quotas, voluntary export restraints, government import standards, government subsidies, and customs classifications, have made buying foreign goods much harder or more expensive than buying domestically produced products. In recent years, however, worldwide trade agreements, such as GATT, along
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with regional trading agreements, like the Maastricht Treaty of Europe, NAFTA, ASEAN, and APEC, have substantially reduced tariff and nontariff barriers to international trade. Companies have responded by investing in growing markets in Asia, eastern Europe, and Latin America. Consumers have responded by purchasing products based on value, rather than geography.
How to Go Global? Once a company has decided that it will go global, it must decide how to go global. For example, if you decide to sell in Singapore, should you try to find a local business partner who speaks the language, knows the laws, and understands the customs and norms of Singapore’s culture, or should you simply export your products from your home country? What do you do if you are also entering eastern Europe, perhaps starting in Hungary? Should you use the same approach in Hungary that you used in Singapore? Although there is no magical formula for answering these questions, after reading the next two sections, you should be able to 2 explain why companies choose to standardize or adapt their business procedures. 3 explain the different ways that companies can organize to do business globally. 2
global consistency When a multinational company has offices, manufacturing plants, and distribution facilities in different countries and runs them all using the same rules, guidelines, policies, and procedures.
local adaptation When a multinational company modifies its rules, guidelines, policies, and procedures to adapt to differences in foreign customers, governments, and regulatory agencies.
CONSISTENCY OR ADAPTATION?
In this section, we return to a key issue: How can you be sure that the way you run your business in one country is the right way to run that business in another? In other words, how can you strike the right balance between global consistency and local adaptation? Global consistency means that when a multinational company has offices, manufacturing plants, and distribution facilities in different countries, it will use the same rules, guidelines, policies, and procedures to run those offices, plants, and facilities. Managers at company headquarters value global consistency because it simplifies decisions. In contrast, a company with a local adaptation policy modifies its standard operating procedures to adapt to differences in foreign customers, governments, and regulatory agencies. Local adaptation is typically more important to local managers who are charged with making the international business successful in their countries. If companies lean too much toward global consistency, they run the risk of using management procedures poorly suited to particular countries’ markets, cultures, and employees (i.e., a lack of local adaptation). For example, when Wal-Mart first entered Mexico, it focused too much on global consistency, filling its stores with items its American customers would want such as ice skates, riding lawn mowers, fishing tackle, and clay pigeons for skeet shooting. After Mexican store managers managed to sell all of these items at heavy discounts, Wal-Mart’s computerized inventory system compounded the mistake by automatically reordering all of these “sold-out” items. Wal-Mart made the same mistake in South America, ordering live trout, American footballs, cordless tools, and leaf blowers.42 While Wal-Mart has learned to listen to local managers—and order sushi, soccer balls, and feijoada (a mixture of beef, pork, and black beans) in its South American stores—if companies focus too much on local adaptation, they run the risk of losing the cost efficiencies and productivity that result from using standardized rules and procedures throughout the world. Therefore, because of its vast purchasing power around the world, Wal-Mart hasn’t given up completely on global consistency. Francisco Martinez, chief financial officer of Comercial Mexicana SA, Wal-Mart’s key rival in Mexico explains why: “I buy 20,000 plastic toys, and
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Wal-Mart buys 20 million. Who do you think gets them cheaper?”43 To systematically take advantage of this purchasing power, Wal-Mart has formed a new global sourcing team of 100 people who work together at its Bentonville, Arkansas headquarters to buy common global products like laundry detergent. The risk, of course, is that the global sourcing team may overlook local tastes and preferences (i.e., local adaptation). If these standard products are accepted by the locals at all of Wal-Mart’s 4,000 stores around the world, however, they’ll be much, much cheaper than anything Wal-Mart’s competition has to offer. Jay Allen, a Wal-Mart spokesperson, says, “There are economies of scale all the way around. We want to make sure we’re getting the best deal. Global sourcing is a big opportunity for us. [But] we’re not there yet.”44
3
FORMS FOR GLOBAL BUSINESS
Besides determining whether to adapt organizational policies and procedures, a company must also determine how to organize itself for successful entry into foreign markets. Historically, companies have generally followed the phase model of globalization, in which a company makes the transition from a domestic company to a global company in the following sequential phases: 3.1 exporting, 3.2 cooperative contracts, 3.3 strategic alliances, and 3.4 wholly owned affiliates. At each step, the company grows much larger, uses those resources to enter more global markets, is less dependent on home country sales, and is more committed in its orientation to global business. Evidence suggests, however, that some companies do not follow the phase model of globalization.46 Some skip phases on their way to becoming more global and less domestic. Others don’t follow the phase model at all. These are known as 3.5 global new ventures. This section reviews these forms of global business.47
3.1 Exporting
When companies produce products in their home countries and sell those products to customers in foreign countries, they are exporting. For example, FremantleMedia, the London-based company that orginally developed the Pop Idol TV show in Britain and then exported a nearly identical version to the United States as American Idol, now has exported similar versions of the show to 22 different countries.48
HE R IGHT T G T H I IN NG DO
Review 2: Consistency or Adaptation? Global business requires a balance between global consistency and local adaptation. Global consistency means using the same rules, guidelines, policies, and procedures in each location. Managers at company headquarters like global consistency because it simplifies decisions. Local adaptation means adapting standard procedures to differences in markets. Local managers prefer a policy of local adaptation because it gives them more control. Not all businesses need the same combinations of global consistency and local adaptation. Some thrive by emphasizing global consistency and ignoring local adaptation. Others succeed by ignoring global consistency and emphasizing local adaptation.
FAIR AND SAFE WORKING CONDITIONS IN FOREIGN FACTORIES Requiring workers to work 15-hour days or to work seven days a week with no overtime pay, beating them for arriving late, requiring workers to apply toxic materials with their bare hands, charging them excessive fees for food and lodging—these are just a few of the workplace violations found in the overseas factories that make shoes, clothes, bicycles, and other goods for large American and multinational companies. The Fair Labor Association, which now inspects these factories for Adidas-Salomon, Levi Strauss, Liz Claiborne, Nike, Reebok, Polo Ralph Lauren, and others, recommends the following workplace standards for foreign factories. • Make sure there is no forced labor or child labor; no physical, sexual, psychological, or verbal abuse or harassment; and no discrimination. • Provide a safe and healthy working environment to prevent accidents. • Respect the right of employees to freedom of association and collective bargaining. Compensate employees fairly by paying the legally required minimum wage or the prevailing industry wage, whichever is higher. • Provide legally required benefits. Employees should not be required to work more than 48 hours per week and 12 hours of overtime (for which they should receive additional pay), and they should have at least one day off per week. Do the right thing. Investigate and monitor the working conditions of overseas factories where the goods sold by your company are made. Insist that improvements be made. Find another supplier if they aren’t.45
exporting Selling domestically produced products to customers in foreign countries.
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ACHIM SCHEIDEMANN/ EPA/ LANDOV
Exporting as a form of global business offers many advantages. It makes the company less dependent on sales in its home market and provides a greater degree of control over research, design, and production decisions. Sheldon Bailey is a “flying producer” who helps FremantleMedia set up Idol in different countries and cultures. Bailey allows for some adaptation to local cultures. In Germany, for example, the word Idol is associated with Hitler, so the show is called Germany Seeks the Superstar; likewise, since popular Arabic songs last eight or nine minutes, three times as long as in the rest of the world, contestants get three minutes to sing, compared to 90 seconds in other versions of Idol. For the most part, however, the show is basically the same worldwide—find undiscovered talents and turn them into major recording artists—and it’s Bailey’s job to ensure that consistentency. When local Russian producers claimed that Russians want to see celebrities and pushed to have them on the show, Bailey refused, “We told them this is not about celebrities, it’s about kids. They’re your stars.” Though advantageous in a number of ways, exporting also has its disadvantages. The primary disadvantage is that many exported goods are subject to tariff and nontariff barriers that can substantially increase their final cost to consumers. A second disadvantage is that transportation costs can significantly increase the price of an exported product. For example, because of special safety requirements, such as maintaining particular temperatures and pressures, the ships that transport liquefied natural gas can cost up to $350 million to build. Consequently, shipping costs account for as much as 20 to 30 percent of the total cost of liquefied natural gas.49 Another disadvantage is that companies that export depend on foreign importers for product distribution. This means that if, for example, the foreign importer makes a mistake on the paperwork that accompanies a shipment of imported goods, those goods can be returned to the foreign manufacturer at the manufacturer’s expense.
Local adaptation is a necessary consideration of global business. For example, since Germans associate the word 'idol' with Hitler, producers exporting the popular "American Idol" television show opted to change the name to "Deutschland sucht den SuperStar" (Germany Seeks the Superstar).
3.2 Cooperative Contracts cooperative contract An agreement in which a foreign business owner pays a company a fee for the right to conduct that business in his or her country.
licensing An agreement in which a domestic company, the licensor, receives royalty payments for allowing another company, the licensee, to produce the licensor’s product, sell its service, or use its brand name in a specified foreign market.
When an organization wants to expand its business globally without making a large financial commitment to do so, it may sign a cooperative contract with a foreign business owner, who pays the company a fee for the right to conduct that business in his or her country. There are two kinds of cooperative contracts: licensing and franchising. Under a licensing agreement, a domestic company, the licensor, receives royalty payments for allowing another company, the licensee, to produce its product, sell its service, or use its brand name in a particular foreign market. For example, brands such as Peter Paul Mounds and Almond Joy, which consumers associate with American companies, are not really American products. A British company, Cadbury Schweppes, licenses Peter Paul Mounds and Almond Joy candy bars to Hershey for U.S. production. One of the most important advantages of licensing is that it allows companies to earn additional profits without investing more money. As foreign sales increase, the royalties paid to the licensor by the foreign licensee increase. Moreover, the licensee, not the licensor, invests in production equipment and facilities to produce the licensed product. Licensing also helps companies avoid tariff and nontariff barriers. Since the licensee manufactures the product within the foreign country, tariff and nontariff barriers don’t apply. For example, Britvic Corona is licensed to bottle and distribute Pepsi-Cola within the United
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Kingdom. Because it bottles Pepsi in Britain, tariff and nontariff barriers do not affect the price or supply of these products. The biggest disadvantage associated with licensing is that the licensor gives up control over the quality of the product or service sold by the foreign licensee. Unless the licensing agreement contains specific restrictions, the licensee controls the entire business, from production, to marketing, to final sales. Many licensors include inspection clauses in their license contracts, but closely monitoring product or service quality from thousands of miles away can be difficult. An additional disadvantage is that licensees can eventually become competitors, especially when a licensing agreement includes access to important technology or proprietary business knowledge. A franchise is a collection of networked firms in which the manufacturer or marketer of a product or service, the franchisor, licenses the entire business to another person or organization, the franchisee. For the price of an initial franchise fee plus royalties, franchisors provide franchisees with training, assistance with marketing and advertising, and an exclusive right to conduct business in a particular location. Most franchise fees run between $5,000 and $35,000. Franchisees pay McDonald’s, one of the largest franchisors in the world, an initial franchise fee of $75,000. Another $455,000 to $768,500 is needed beyond that to pay for food inventory, kitchen equipment, construction, landscaping, and other expenses (the cost varies per country). While franchisees typically borrow part of this cost from a bank, McDonald’s requires that they invest $200,000 of their own money into a new McDonald’s restaurant.50 Since typical royalties range from 2.0 to 12.5 percent of gross sales, franchisors are well rewarded for the help they provide to franchisees.51 More than 400 U.S. companies franchise their businesses to foreign franchise partners. Overall, franchising is a fast way to enter foreign markets. Over the last 20 years, U.S. franchisors have more than doubled their global franchises for a total of more than 100,000 global franchise units! Because it gives the franchisor additional cash flows from franchisee fees and royalties, franchising can be a good strategy when a company’s domestic sales have slowed. For example, Yum! Brands, which owns and runs Pizza Hut, Taco Bell, KFC, (formerly Kentucky Fried Chicken), A&W (Root Beer) Restaurants, and Long John Silvers, is accepting very few new United States franchises because the U.S. market is saturated with fast-food outlets. McDonald’s opens only about 100 new restaurants a year in the United States.52 Outside the United States, however, these restaurants are experiencing much stronger growth. In the last decade, McDonald’s nearly doubled the number of its overseas restaurants and continues to add approximately 500 new international restaurants per year.53 Between Pizza Hut, Taco Bell, KFC, A&W Restaurants, and Long John Silvers, Yum! Brands opens nearly 1,000 new international franchise restaurants a year.54 Despite franchising’s many advantages, franchisors face a loss of control when they sell businesses to franchisees who are thousands of miles away. Although there are exceptions, franchising success may be somewhat culturebound. In other words, because most global franchisors begin by franchising their businesses in similar countries or regions (Canada is by far the first choice for American companies taking their first step into global franchising), and because 65 percent of franchisors make absolutely no change in their business for overseas franchisees, that success may not generalize to cultures with different lifestyles, values, preferences, and technological infrastructures. When Jim Bryant began opening Subway Sandwich shops in China 10 years ago, Americans were elated (one kissed the floor), but Chinese customers didn’t know how to order (he had to make signs explaining how) or how to eat a sandwich (they peeled it like a banana because they didn’t want to physically touch their food). Likewise, because the tuna in the tuna salad didn’t have a visible head or a tail, they didn’t believe it was actually fish.55 Management consultant Dennis
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franchise A collection of networked firms in which the manufacturer or marketer of a product or service, the franchisor, licenses the entire business to another person or organization, the franchisee.
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Custage says, “The number one mistake companies make is trying to run everything the way it was in their home country, with a bunch of expatriates.”56 Furthermore, unlike McDonald’s, which added a new spicy chicken burger, and KFC, which replaced coleslaw with “shredded carrots, fungus, or bamboo shoots,” Subway didn’t change its menu for Chinese tastes. Luo Bing Ling, who runs a Subway store in Beijing, says, “Subway should have at least one item tailored to Chinese tastes to show they are respecting the local culture.”57
3.3 Strategic Alliances strategic alliance An agreement in which companies combine key resources, costs, risk, technology, and people.
joint venture A strategic alliance in which two existing companies collaborate to form a third, independent company.
Companies forming strategic alliances combine key resources, costs, risks, technology, and people. The most common strategic alliance is a joint venture, which occurs when two existing companies collaborate to form a third company. The two founding companies remain intact and unchanged, except that, together, they now own the newly created joint venture. One of the oldest, most successful global joint ventures is Fuji-Xerox, which is a joint venture between Fuji Photo Film of Japan and U.S.-based Xerox Corporation, which makes copiers and automated office systems. More than 43 years after its creation, Fuji-Xerox employs nearly 34,000 employees and has close to $9.5 billion in revenues. Fuji-Xerox is largely responsible for copier sales in Asia, whereas Xerox is responsible for North American sales. Rank Xerox, a Xerox subsidiary, is responsible for sales in Europe.58 One of the advantages of global joint ventures is that, like licensing and franchising, they help companies avoid tariff and nontariff barriers to entry. Another advantage is that companies participating in a joint venture bear only part of the costs and the risks of that business. Many companies find this attractive because of the expense of entering foreign markets or developing new products. For example, General Electric and Mitsubishi Electric have formed Powerex, an international joint venture to share the high development costs of designing and making parts for hybrid cars that run on both gasoline and electric power. Powerex makes electronic parts that help convert brake heat into power that is stored in batteries to run the electric motor when the car starts and during acceleration. Once the car attains a stable speed, the gasoline engine takes over and recharges the batteries. Hybrid cars are capable of getting 70 percent more miles per gallon than standard cars in city driving.59 Global joint ventures can be especially advantageous to smaller local partners that link up with larger, more experienced foreign firms that can bring advanced management, resources, and business skills to the joint venture. For instance, SasolChevron is a global joint venture between Sasol, a small South African oil company with expertise in turning natural gas into extremely clean liquid fuel and gas, and ChevronTexaco, the second largest U.S. oil company with 47,000 employees in 180 countries worldwide. Sasol has what Chevron lacks, specialized expertise in turning natural gas into liquid fuels, and Chevron has what Sasol needs, access to global markets and extensive experience with product marketing and natural gas utilization.60 Global joint ventures are not without problems, though. Because companies share costs and risks with their joint venture partners, they must also share profits. At one time, sharing of profits created some tension at Fuji Color Film, Xerox, and their joint venture, Fuji-Xerox. In fact, until Xerox’s, recent turnaround, the company struggled for so long that business experts joked that FujiXerox, which has been highly profitable, should purchase Xerox.61 Managing global joint ventures can also be difficult because they represent a merging of four cultures: the country and organizational cultures of the first partner, and the country and organizational cultures of the second partner. Oftentimes, to be “fair” to all involved, each partner in the global joint venture will have equal ownership and power. But this can result in power struggles and
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a lack of leadership. For example, AT&T and British Telecom, two of the world’s largest telecommunications companies, invested $3 billion each to form a joint venture called Concert to provide communication services to multinational corporations, only to take $7 billion in losses to close Concert down 18 months later.62 According to industry analyst Jim Rawitsch, Concert failed because “whenever you go into a situation where power is equally shared, it becomes like a marriage. In order for anything to happen, both have to agree. If one partner had 51 percent, it would be easier.”63 Because of these problems, companies forming global joint ventures should carefully develop detailed contracts that specify the obligations of each party. Toshiba, which participated in its first global joint ventures in the early 1900s by making light bulb filaments with General Electric, treats joint ventures like a marriage of the two companies and views the contract as a prenuptial agreement.64 In other words, the joint venture contract specifies how much each company will invest, what its rights and responsibilities are, and what it is entitled to if the joint venture does not work out. These steps are important, because the rate of failure for global joint ventures is estimated to be as high as 33 to 50 percent.65
3.4 Wholly Owned Affiliates (Build or Buy) Approximately one-third of multinational companies enter foreign markets through wholly owned affiliates. Unlike licensing arrangements, franchises, or joint ventures, wholly owned affiliates are 100 percent owned by the parent company. For example, Honda Motors of America in Marysville, Ohio, is 100 percent owned by Honda Motors of Japan. Ford Motor of Germany in Cologne is 100 percent owned by the Ford Motor Company in Detroit, Michigan. The primary advantage of wholly owned businesses is that the parent company receives all of the profits and has complete control over the foreign facilities. The biggest disadvantage is the expense of building new operations or buying existing businesses. While the payoff can be enormous if wholly owned affiliates succeed, the losses can be immense if they fail because the parent company assumes all of the risk. Two years after Vodafone, the world’s largest cell phone company, paid $2.2 billion to acquire J-Phone, the third largest Japanese cell phone company, annual revenues continue to fall, and the number of new subscribers has dropped by 87 percent—a bad sign for future sales. The problem is that Vodafone focuses on selling small, reliable phones that work anywhere in the world, but most Japanese customers don’t care whether their phones work outside the country. They want stylish, flashy, high-tech G3 cell phones that can download music, games, videos, and email. And, because Vodafone owns J-Phone, it is bearing all the risk. Darryl Green, president of Vodafone in Japan, says, “We’re losing our share of heavy users,” the most profitable customers in the cell phone business.66
3.5 Global New Ventures Companies used to evolve slowly from small operations selling in their home markets to large businesses selling to foreign markets. Furthermore, as companies went global, they usually followed the phase model of globalization. Recently, however, three trends have combined to allow companies to skip the phase model when going global. First, quick, reliable air travel can transport people to nearly any point in the world within one day. Second, low-cost communication technologies, such as international email, teleconferencing, phone conferencing, and the Internet, make it easier to communicate with global customers, suppliers, managers, and employees. Third, there is now a critical mass of businesspeople with extensive personal experience in all aspects of global business.67 This combination of developments has made it possible to
wholly owned affiliates Foreign offices, facilities, and manufacturing plants that are 100 percent owned by the parent company.
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global new ventures New companies that are founded with an active global strategy and have sales, employees, and financing in different countries.
start companies that are global from inception. With sales, employees, and financing in different countries, global new ventures are new companies founded with an active global strategy.68 Although there are several different kinds of global new ventures, all share two common factors. First, the company founders successfully develop and communicate the company’s global vision from inception. Winphoria Networks, which specializes in wireless networks, was global the day it started. Company investor Promod Haque explained: “Sales and marketing and the CEO were in Boston,” but “the center of gravity was outside the United States. By having our employees based in Madrid [Spain] and Bangalore [India], we were [by design] bidding contracts in Europe and Asia” during a time when sales were slow in the United States.69 Second, rather than going global one country at a time, new global ventures bring a product or service to market in several foreign markets at the same time. For example, Bitfone Corporation provides software that allows mobile phone companies to wirelessly update the operating system in a user’s mobile phone. Providing automatic, wireless updates to customers’ phones helps mobile phone providers reduce costs, improve reliability, decrease problems, and provide new phone services and capabilities as they become available. With mobile phone providers and hundreds of millions of mobile phones in use on every continent but Antarctica, California-based Bitfone, which is able to sell its software anywhere mobile phones are used, was a global company from its inception.70
Review 3: Forms for Global Business The phase model of globalization says that as companies move from a domestic to a global orientation, they use these organizational forms in sequence: exporting, cooperative contracts (licensing and franchising), strategic alliances, and wholly owned affiliates. Yet not all companies follow the phase model. For example, global new ventures are global from their inception.
Where to Go Global? Deciding where to go global is just as important as deciding how your company will go global. After reading the next three sections, you should be able to 4 explain how to find a favorable business climate. 5 discuss the importance of identifying and adapting to cultural differences. 6 explain how to successfully prepare workers for international assignments. 4
FINDING THE BEST BUSINESS CLIMATE
When deciding where to go global, companies try to find countries or regions with promising business climates. An attractive global business climate 4.1 positions the company for easy access to growing markets, 4.2 is an effective but cost-efficient place to build an office or manufacturing facility, and 4.3 minimizes the political risk to the company.
4.1 Growing Markets The most important factor in an attractive business climate is access to a growing market. For example, no product is known and purchased by as many people throughout the world as Coca-Cola. Yet, even Coke, which is available in over 200 countries, still has tremendous potential for further global growth. Currently, the Coca-Cola Company gets about 80 percent of its sales from its 16 largest markets.71 The remaining 20 percent is spread across the other 200
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Per Capita Consumption of Coca-Cola
countries in which Coke does business. Coke’s former CEO said, “We have really just begun reaching out to the 95 percent of the world’s population that lives outside the U.S.”72 Two factors help companies determine the growth potential of foreign markets: purchasing power and foreign competitors. Purchasing power is measured by comparing the relative cost of a standard set of goods and services in different countries. Earlier in the chapter we noted that a Coke costs $1.89 in Tokyo. Because a Coke costs only about $1.00 in the United States, the average American would have more purchasing power than the average Japanese. Purchasing power is surprisingly strong in countries like Mexico, India, and China, which have low average levels of income. This is because basic living expenses, such as food, shelter, and transportation, are very inexpensive in those countries, so consumers still have money to spend after paying for necessities. To illustrate, the average Chinese household spends only 5 percent of its income on basic living expenses, whereas the average American household spends 45 to 50 percent.73 Because basic living expenses are so low in China, Mexico, and India, purchasing power is strong, and millions of Chinese, Mexican, and Indian consumers increasingly have extra money to spend on what they want, in addition to what they need.74 Consequently, countries with high and growing levels of purchasing power are good choices for companies looking for attractive global markets. As Exhibit 8.5 shows, Coke has found that the per capita consumption of Coca-Cola, or the number of Cokes a person drinks per year, rises directly with purchasing power. For example, in eastern Europe, as countries began to embrace capitalism after the fall of communism, per capita consumption of Coke increased from 20 to 31 Cokes in just two years; now, more than a decade and a half later, it is at 238 Cokes per year.75 The second part of assessing the growth potential of global markets involves analyzing the degree of global competition, which is determined by the number and quality of companies that already compete in a foreign market. Intel has been in China for 20 years not only because of the size of the potential market—China has 1.3 billion people and 95 percent of Chinese homes still
600 500
Mexico
400 Chile
Typically, the higher the purchasing power in a country, the better that country will be for doing business. Why? Because higher purchasing power means that consumers have more money to spend on nonessential products, like soft drinks. Coca-Cola has found that per capita consumption of Coca-Cola, that is, the average number of soft drinks a person will drink per year, rises directly with purchasing power (see the solid line). Were it not for Mexico, which has United States the highest per capita consumption but low purchasing power, the relationship (see the dotted line) between purchasing power and per capita consumption of Coca-Cola would even be stronger. Australia
300
Spain
100
Germany
Argentina
Phillipines
Great Britain Japan
China Italy
50
Colombia
France
South Korea
China
0 0
5,000
10,000
15,000 20,000
25,000 30,000 35,000 40,000
Purchasing Power (per capita real GDP) Sources: “Rank Order—GDP—Per Capita,” The World Factbook, [Online] available at http://www.cia.gov/cia/publications/ factbook/rankorder/2004rank.html, 24 April 2005; “Operations Review: Selected Market Results,” The Coca-Cola Company 2000 Annual Report, [Online] available at http://www2.coca-cola.com/investors/annualreport/2002/or_smr.htm, 28 June 2003.
purchasing power A comparison of the relative cost of a standard set of goods and services in different countries.
Exhibit 8.5 How Consumption of Coca-Cola Varies with Purchasing Power around the World
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don’t have a computer—but also because there was almost no competition. But now that China is the third largest computer chip market in the world, Intel faces competition from AMD, Intel’s primary U.S. competitor, which entered China four years ago, and Shanghai Semiconductor Manufacturing International, a five-year-old Chinese company that manufactures low-end chips. Intel’s 20-year head start, however, has given it a dominating 84 percent share of the Chinese market.76
4.2 Choosing an Office/Manufacturing Location
Belgium
Netherlands
Germany
UK
France
Ireland
% of Total Population
Belgium
Netherlands
Germany
UK
France
Ireland
% of Total Population
Belgium
Netherlands
Germany
UK
France
Ireland
% of Total Population
Companies do not have to establish an office or manufacturing location in each country they enter. They can license, franchise, or export to foreign markets, or they can serve a larger region from one country. Thus, the criteria for choosing an office/manufacturing location are different from the criteria for entering a foreign market. Rather than focusing on costs alone, companies should consider both qualitative and quantitative factors. Two key qualitative factors are work force quality and company strategy. Work force quality is important because it is often difficult to find workers with the specific skills, abilities, and experience that a company needs to run its business. Work force quality is one reason that many companies doing business in Europe locate their customer call centers in the Netherlands. As shown in Exhibit 8.6, workers in the Netherlands are the most linguistically gifted in Europe, with 73 percent speaking two languages, 44 percent speaking three languages, and 12 percent speaking more than three. Of course, with employees who speak several languages, call centers located in the Netherlands can handle calls from more countries and generally employ 30 to 50 percent fewer employees than those located in other parts of Europe. Another advantage of locating a call center in the Netherlands is that 60 percent of call center workers have university or advanced degrees in technology or management.77 A company’s strategy is also important when choosing a location. For example, a company pursuing a low-cost strategy may need plentiful raw materials, low-cost transportation, and low-cost labor. A company pursuing a differentiation strategy (typically a higher-priced, better product or service) may need access to high-quality materials and a highly skilled and educated work force. Quantitative factors, such as the kind of facility being built, tariff and nontariff barriers, exchange rates, and transportation and labor costs, should also Exhibit 8.6 be considered when choosing an office/manufacturing location. Regarding the Quality of the Netherlands Work kind of facility being built, a real estate specialist in company location decisions Force for Call Center Jobs explained: “If it’s an assembly plant, a company might be inclined to look for incentives that would subsidize its hiring. With a distribution Multilingual Work Force Multilingual Work Force Multilingual Work Force facility, an adequate transportaTwo languages Three languages More than three languages tion network will likely be criti75 75 75 cal. A corporate headquarters will need a good communica50 50 50 tions network, a multilingual 25 25 25 labor force, and easy access by air. On the other hand, a 0 0 0 research and development operation will require proximity to a high-tech infrastructure and access to good universities.”78 Sources: “Fact Sheet, Call Center Solutions: How Call Centers Can Work for You,” The Netherlands Foreign Investment Exhibit 8.7 shows the Agency, [Online] available at http://www.nfia.com/html/solution/fact.html, 15 September 2001; “Customer Care Cenworld’s top cities for global ters,” Netherlands Foreign Investment Agency Information Manual, 26 April 2005, [Online] available at http://www.nfia.com/downloads/customercare.htm. business. This information is a
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Frankfurt Amsterdam
London Brussels Paris Toronto New York City Chicago
Beijing
Atlanta Miami
Los Angeles
Hong Kong
Shanghai
New Dehli Monterrey Mexico City
Mumbai
São Paulo Santiago
North America
Latin America
1. 2. 3. 4. 5.
1. 2. 3. 4. 5.
New York City Chicago Toronto Atlanta Los Angeles
Santiago Miami São Paulo Monterrey (Mexico) Mexico City
Europe 1. 2. 3. 4. 5.
Asia Pacific 1. 2. 3. 4. 5.
London Paris Frankfurt Brussels Amsterdam
Sources: M. Borden, “The Best Cities for Business: Big, Established, Monied Metropolises—With a Tech Twist—Top Fortune’s Annual Ranking at the Turn of the Century,” Fortune, 27 November 2000, 218; C. Murphy, “Winners of the World,” Fortune, 27 November 2000, 232; “Miami Is the Best City for Doing Business in Latin America, According to AmericaEconomia Magazine,” PR Newswire, 24 April 2003; “Shanghai Takes Top Position as Destination for Future Worldwide Expansion in ‘European Cities Monitor,’ “ Cushman & Wakefield Asia Pacific, 30 September 2004, [Online] available at http://www.cushwakeasia.com/aboutus/pdf/news/ECM%20PR%20asia%20version%202004%20release%20on%203009.pdf.
Shanghai Beijing New Dehli Hong Kong Mumbai
Exhibit 8.7 World’s Best Cities for Business
good starting point if your company is trying to decide where to put an international office or manufacturing plant.
4.3 Minimizing Political Risk When managers think about political risk in global business, they envision burning factories and riots in the streets. Although political events such as these receive dramatic and extended coverage from the media, the political risks that most companies face usually are not covered as breaking stories on FoxNews and CNN. Nonetheless, the negative consequences of ordinary political risk can be just as devastating to companies that fail to identify and minimize that risk.79 When conducting global business, companies should attempt to identify two types of political risk: political uncertainty and policy uncertainty.80 Political uncertainty is associated with the risk of major changes in political regimes that can result from war, revolution, death of political leaders, social unrest, or other influential events. Policy uncertainty refers to the risk associated with changes in laws and government policies that directly affect the way foreign companies conduct business. Policy uncertainty is the most common form of political risk in global business and perhaps the most frustrating. For example, nationalized health care is the norm in most of Europe. So, instead of dealing with insurance providers, and health maintenance organizations, pharmaceutical companies negotiate directly with European governments, which, to no one’s surprise, pressure them for price cuts. Though the companies are used to being pressured for price cuts, they face the additional problem that reductions in prices in one European
political uncertainty The risk of major changes in political regimes that can result from war, revolution, death of political leaders, social unrest, or other influential events.
policy uncertainty The risk associated with changes in laws and government policies that directly affect the way foreign companies conduct business.
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country can start a chain reaction leading to cuts in others. This occurs in two ways. First, if the pharmaceutical 90 companies negotiate lower prices for 83 80 particular drugs in one country, other 70 68 countries in the European Union insist 66.7 68.3 65 60 58.3 61.7 on the same low prices, when they rene55 51.7 50 gotiate. Second, drug wholesalers in 46.7 46 43.3 40 countries with low prices, such as Spain 30 and Portugal, aggressively sell their 20 lower-cost drugs in countries with 10 higher drug prices. For instance, 0 Avapro, a blood pressure pill, is supposed to cost 79 cents in the United Kingdom, but the British health-care system buys Avapro for 70 to 72 cents a pill from Spanish drug wholesalers, who, because of Spain’s lower negotiated prices (58 cents per Avapro), make Source: “UAE Quarterly Forecast Report,” BMI Ratings, 3rd Quarter 2004, 3–6. a good profit on the sale. Jean-François Dehecq, CEO of Sanofi-Aventis, a French pharmaceutical company, says, “StepExhibit 8.8 Long-Term Political Risk in the by-step, the profitability of European markets is decreasing.”81 Middle East Several strategies can be used to minimize or adapt to the political risk inherent in global business. An avoidance strategy is used when the political risks associated with a foreign country or region are viewed as too great. If firms are already invested in high-risk areas, they may divest or sell their businesses. If they have not yet invested, they will likely postpone their investment until the risk shrinks. Exhibit 8.8 shows the long-term political risk for various countries in the Middle East (higher scores indicate less political risk). The following factors, which were used to compile these ratings, indicate greater political risk: government instability, poor socioeconomic conditions, internal or external conflict, military involvement in FOREIGN CORRUPT BUSINESS politics, religious and ethnic tensions, foreign debt as a perPRACTICES ACT centage of gross domestic product, exchange rate instability, The Foreign Corrupt Business Practices Act (FCPA) prohibits company managers, and high inflation.82 An avoidance strategy would likely be employees, or agents from offering used for the riskiest countries shown in Exhibit 8.8, such as money or anything else of value to bribe Iran, Lebanon, and Syria, but would probably not be needed officials of foreign governments or politifor the least risky countries, such as Israel, Jordan, Kuwait, or cal parties to use their influence to help Oman. Risk conditions and factors change, so be sure to make that firm acquire new business or keep risk decisions with the latest available information from reexisting business in that country. Individsources such as the PRS Group, http://www.prsgroup.com, uals violating the FCPA can be fined up to which supplies information about political risk to 80 percent $100,000 and imprisoned for up to 10 of the Fortune 500 companies. years. Companies that violate the FCPA Control is an active strategy to prevent or reduce political can be fined up to $2 million, suspended risks. Firms using a control strategy lobby foreign governments from government contracts, denied export licensing privileges, and investior international trade agencies to change laws, regulations, or gated by the Securities and Exchange trade barriers that hurt their business in that country. Commission. U.S. businesspeople often Another method for dealing with political risk is cooperaworry that the FCPA puts them at a disadtion, which involves using joint ventures and collaborative convantage because other countries have tracts, such as franchising and licensing. Although cooperation permitted bribes to be deducted as busidoes not eliminate the political risk of doing business in a ness expenses. Recently, however, 33 macountry, it does limit the risk associated with foreign ownerjor trading partners of the United States ship of a business. For example, a German company forming a agreed to enact laws similar to the 83 joint venture with a Chinese company to do business in China FCPA. may structure the joint venture contract so that the Chinese company owns 51 percent or more of the joint venture. Doing
THE R IGHT TH G IN IN O G D
United Arab Emirates
Turkey
Syria
Saudi Arabia
Oman
Lebanon
Kuwait
Jordan
Israel
Iran
Egypt
Bahrain
Long-Term Political Risk
Higher scores indicate less long-term political risk, which is calculated by estimating government instability, socioeconomic conditions, internal or external conflicts, military involvement with politics, religious and ethnic tensions, foreign debt as a percent of gross domestic product, exchange rate instability, and whether there is high inflation.
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so qualifies the joint venture as a Chinese company and exempts it from Chinese laws that apply to foreign-owned businesses.
Review 4: Finding the Best Business Climate The first step in deciding where to take your company global is finding an attractive business climate. Be sure to look for a growing market where consumers have strong purchasing power and foreign competitors are weak. When locating an office or manufacturing facility, consider both qualitative and quantitative factors. In assessing political risk, be sure to examine political uncertainty and policy uncertainty. If the location you choose has considerable political risk, you can avoid it, try to control the risk, or use a cooperation strategy. 5
BECOMING AWARE OF CULTURAL DIFFERENCES
AFP/ GETTY IMAGES
Some of the more interesting and amusing aspects of global business are the unexpected confrontations that people have with cultural differences, “the way they do things over there.” For example, as part of a class assignment in global business, a high school class in Dearborn, Michigan, and a high school class in Valle, Spain, agreed to form a global “joint venture.” The two classes agreed that the U.S. students would buy Spanish products from the Spanish students and resell them at a profit to other American students. Likewise, the Spanish students would purchase American products from the American students and then resell them at a profit to their Spanish friends. Now, what to buy from each other? The American students decided to buy giant beach towels showing teenage Spanish lovers. One towel showed a boy helping his girlfriend remove her shirt. Another showed him unzipping her jeans. In Spain’s culture, which is much more relaxed about sexuality than American culture, no one gives these towels a second thought. Of course, despite protestations of censorship, the U.S. high school teacher vetoed the towels as too suggestive.84 American sensitivities about sexual issues, however, are nothing compared to those in Islamic cultures where any display of sexual images may potentially offend customers or government agencies. For example, in Saudi Arabia, even store mannequins must not show male or female shapes or characteristics of any kind. Therefore, most Saudi mannequins are headless and have no fingers. Likewise, in Islamic Malaysia, models in ads cannot be shown in any state of undress (such as bras or underwear), and if a man and woman are shown alone in an ad, they must clearly be married.85 National culture is the set of shared values and beliefs that affects the perceptions, decisions, and behavior of the people from a particular country. The first step in dealing with culture is to recognize that there are meaningful differences in national cultures. Geert Hofstede has spent the last 20 years studying cultural differences in 53 different countries. His research shows that there are five consistent cultural dimensions across countries: power distance, individualism, masculinity, uncertainty avoidance, and short-term versus long-term orientation.86 Power distance is the extent to which people in a country accept that power is distributed unequally in society and organizations. In countries where power distance is weak, such as Denmark and Sweden, employees don’t like their organization or their boss to have power over them or tell them what to do. They want to have a say in decisions that affect them. As Exhibit 8.9 shows, Russia and China, with scores of 95 and 80,
national culture The set of shared values and beliefs that affects the perceptions, decisions, and behavior of the people from a particular country.
One area where comparisons of national culture are most striking is sexuality. In Saudi Arabia, even store mannequins must be without heads or limbs that would indicate gender.
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Hofstede’s Cultural Dimensions
258
To determine the cultural characteristics of a country, compare the number and vertical distance (higher means more) of that country on a particular cultural dimension (color coded and labeled on the right side of the exihibit) with those of other countries. For example, with a score of 96, Hong Kong has the second highest long-term orientation; it is exceeded only by China, which has a score of 118. By contrast, with a score of 10, Russia has the weakest long-term orientation. Likewise, while Hong Kong has a strong long-term orientation (98), it has a very weak individualistic orientation (25).
80 44 29
10
31 86
65 62
44
53 66
95
29
67
35
54
USA
Germany
Japan
Exhibit 8.9 Hofstede’s Five Cultural Dimensions
Uncertainty Avoidance
90
48
40
60
14
57
80
25
68 38
68
46
46
Masculinity Individualism
43
46
40
Long-Term Orientation
90 25
71 91
16
96
92
46
118
50
Power Distance
50
14
20
78
77
France Netherlands Hong Kong Indonesia West Africa
20 95
Russia
80
China
Source: G. H. Hofstede, “Cultural Constraints in Management Theories,” Academy of Management Executive 7, no. 1 (1993): 81–94.
respectively, are much stronger in power distance than Germany (35), the Netherlands (38), and the United States (40). Individualism is the degree to which societies believe that individuals should be self-sufficient. In individualistic societies, employees put loyalty to themselves first and loyalty to their company and work group second. In Exhibit 8.9, the United States (91), the Netherlands (80), France (71), and Germany (67) are the strongest in individualism, while West Africa (20), China (20), and Indonesia (14) are the weakest. Masculinity and femininity capture the difference between highly assertive and highly nurturing cultures. Masculine cultures emphasize assertiveness, competition, material success, and achievement, whereas feminine cultures emphasize the importance of relationships, modesty, caring for the weak, and quality of life. In Exhibit 8.9, Japan (95), Germany (66), and the United States (62) have the most masculine orientations, while the Netherlands (14) has the most feminine orientation. The cultural difference of uncertainty avoidance is the degree to which people in a country are uncomfortable with unstructured, ambiguous, unpredictable situations. In countries with strong uncertainty avoidance, like Greece and Portugal, people tend to be aggressive and emotional and seek security (rather than uncertainty). In Exhibit 8.9, Japan (92), France (86), West Africa (90), and Russia (90) are strongest in uncertainty avoidance, while Hong Kong (29) is the weakest. Short-term/long-term orientation addresses whether cultures are oriented to the present and seek immediate gratification, or to the future and defer gratification. Not surprisingly, countries with short-term orientations are consumer driven, whereas countries with long-term orientations are savings driven. In Exhibit 8.9, China (118) and Hong Kong (96) have very strong long-term orientations, while Russia (10), West Africa (16), Indonesia (25), the United States (29), and Germany (31) have very strong short-term orientations. Cultural differences affect perceptions, understanding, and behavior. Recognizing cultural differences is critical to succeeding in global business. Nevertheless, as Hofstede pointed out, descriptions of cultural differences are
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based on averages—the average level of uncertainty avoidance in Portugal, the average level of power distance in Argentina, and so forth. Accordingly, said Hofstede, “If you are going to spend time with a Japanese colleague, you shouldn’t assume that overall cultural statements about Japanese society automatically apply to this person.”87 Similarly, cultural beliefs may differ significantly from one part of a country to another.88 After becoming aware of cultural differences, the second step is deciding how to adapt your company to those differences. Unfortunately, studies investigating the effects of cultural differences on management practice point more to difficulties than to easy solutions. One problem is that different cultures will probably perceive management policies and practices differently. For example, blue-collar workers in France and Argentina, all of whom performed the same factory jobs for the same multinational company, perceived its company-wide safety policy differently.89 French workers perceived that safety wasn’t very important to the company, but Argentine workers thought that it was. The fact that something as simple as a safety policy can be perceived differently across cultures shows just how difficult it can be to standardize management practices across different countries and cultures. Another difficulty is that cultural values are changing, albeit slowly, in many parts of the world. The fall of communism in eastern Europe and the former Soviet Union and the broad economic reforms in China have produced sweeping changes on two continents in the last decade. Thanks to increased global trade resulting from GATT and other regional free trade agreements, major economic transformations are also under way in India, Mexico, Central America, and South America. Consequently, when trying to adapt management practices to cultural differences, companies must ensure that they are not basing their adaptations on outdated and incorrect assumptions about a country’s culture.
Review 5: Becoming Aware of Cultural Differences National culture is the set of shared values and beliefs that affects the perceptions, decisions, and behavior of the people from a particular country. The first step in dealing with culture is to recognize meaningful differences, such as power distance, individualism, masculinity, uncertainty avoidance, and short-term/ long-term orientation. Cultural differences should be carefully interpreted because they are based on averages, not individuals. Adapting managerial practices to cultural differences is difficult because policies and practices can be perceived differently in different cultures. Another difficulty is that cultural values may be changing in many parts of the world. Consequently, when companies try to adapt management practices to cultural differences, they need to be sure that they are not using outdated assumptions about a country’s culture. 6
PREPARING FOR AN INTERNATIONAL ASSIGNMENT
Around a conference table in a large U.S. office tower, three American executives sat with their new boss, Mr. Akiro Kusumoto, the newly appointed head of a Japanese firm’s American subsidiary, and two of his Japanese lieutenants. The meeting was called to discuss ideas for reducing operating costs. Mr. Kusumoto began by outlining his company’s aspirations for its long-term U.S. presence. He then turned to the budgetary matter. One Japanese manager politely offered one suggestion, and an American then proposed another. After gingerly discussing the alternatives for quite some time, the exasperated American blurted out: “Look, that idea is just not going to have much impact. Look at the numbers!” In the face of such bluntness, uncommon and unacceptable in Japan, Mr. Kusumoto fell silent. He leaned back, drew air between his teeth, and felt a deep longing to return home. He realized his life in this country would be filled with many such jarring encounters and lamented his posting to a land of such rudeness.90
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expatriate Someone who lives and works outside his or her native country.
Mr. Kusumoto is a Japanese expatriate, someone who lives and works outside his or her native country. The cultural shock that he was experiencing is common. The difficulty of adjusting to language, cultural, and social differences is the primary reason for expatriate failure in overseas assignments. For example, although there have recently been disagreements among researchers about these numbers, it is probably safe to say that 5 to 20 percent of American expatriates sent abroad by their companies will return to the United States before they have successfully completed their assignments.91 Of those who do complete their international assignments, about one-third are judged by their companies to be no better than marginally effective.92 Since the average cost of sending an employee on an international assignment can run between $500,000 and $3 million (depending on the length of the assignment and the employee’s position), failure in those assignments can be extraordinarily expensive.93 The chances for a successful international assignment can be increased through 6.1 language and cross-cultural training and 6.2 consideration of spouse, family, and dual-career issues.
6.1 Language and Cross-Cultural Training Predeparture language and cross-cultural training can reduce the uncertainty that expatriates feel, the misunderstandings that take place between expatriates and natives, and the inappropriate behaviors that expatriates unknowingly commit when they travel to a foreign country. Indeed, simple things like using a phone, finding a public toilet, asking for directions, knowing how much things cost, exchanging greetings, or understanding what people want can become tremendously complex when expatriates don’t know a foreign language or a country’s customs and cultures. In his book Blunders in International Business, David Ricks tells the story of an American manager working in the South Pacific who, by hiring too many local workers from one native group, unknowingly upset the balance of power in the island’s traditional status system. The islanders met on their own and quickly worked out a solution to the problem. After concluding their meeting at 3 A.M., they calmly went to the manager’s home to discuss their solution with him (time was not important in their culture). But, since the American didn’t speak their language and didn’t understand why they had shown up en masse outside his home at 3 A.M., he called in the Marines, who were stationed nearby, to disperse what he thought was a “riot.” Expatriates who receive predeparture language and cross-cultural training make faster adjustments to foreign cultures and perform better on their international assignments.94 Unfortunately, only a third of the managers who go on international assignments are offered any kind of predeparture training, and only half of those actually participate in the training!95 Suzanne Bernard, director of international mobility at Bombardier, Inc. in Canada, says, “We always offer cross-cultural training, but it’s very seldom used by executives leaving in a rush at the last minute.”96 This is somewhat surprising given the failure rates for expatriates and the high cost of those failures. Furthermore, with the exception of some language courses, predeparture training is not particularly expensive or difficult to provide. Three methods can be used to prepare workers for international assignments: documentary training, cultural simulations, and field experiences. Documentary training focuses on identifying specific critical differences between cultures. For example, when 60 workers at Axcellis Technologies in Beverly, Massachusetts, were preparing to do business in India, they learned that while Americans make eye contact and shake hands firmly when greeting others, Indians, as a sign of respect, do just the opposite, avoiding eye contact and shaking hands limply.97
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After learning specific critical differences through documentary training, trainees can then participate in cultural simulations, in which they practice adapting to cultural differences. After the workers at Axcellis Technologies learned about key differences between themselves and Indian workers, they practiced adapting to those differences by participating in role-plays: some Axcellis workers would take the roles of Indian workers, while other Axcellis workers would play themselves and try to behave in a way consistent with Indian culture. As they role-played, Indian music played loudly in the background, and they were coached on what to do or not do by Bidhan Chandra, an international consultant. Chandra says, “When people understand these differences, they’re less likely to make mistakes with each other.” Human resources director Randy Longo said, “At first, I was skeptical and wondered what I’d get out of the class. But it was enlightening for me. Not everyone operates like we do in America.” Finally, field simulation training, a technique made popular by the U.S. Peace Corps, places trainees in an ethnic neighborhood for three to four hours to talk to residents about cultural differences. For example, a U.S. electronics manufacturer prepared workers for assignments in South Korea by having trainees explore a nearby South Korean neighborhood and talk to shopkeepers and people on the street about South Korean politics, family orientation, and day-to-day living practices.
6.2 Spouse, Family, and Dual-Career Issues At the request of his company, Sam and his wife Janet moved to London for Sam’s international assignment. Their plush apartment was across the street from the world-famous Harrod’s department store and was also close to London’s best parks, museums, and gardens. Sam’s salary was high enough to enable them to afford full-time child care. By most accounts, Sam and Janet should have had a wonderful experience in London. Nonetheless, Janet was miserable, and consequently, so was Sam. Their social life was active but revolved around Sam’s business clients. Janet was lonely. She missed her job, which she gave up to come to London. She also missed her friends in Atlanta. Sam and Janet divorced after they returned to the United States.98 Not all international assignments turn out so badly for expatriates and their families, but the evidence clearly shows that how well an expatriate’s spouse and family adjust to the foreign culture is the most important factor in determining the success or failure of an international assignment.99 Barry Kozloff, of Selection Research International, says, “The cost of sending a family on a foreign assignment is around a million dollars and their failure to adjust is an enormous loss.”100 Unfortunately, despite its importance, there has been little systematic research on what does and does not help expatriates’ families successfully adapt. A number of companies, however, have found that adaptability screening and intercultural training for families can lead to more successful overseas adjustment. Adaptability screening is used to assess how well managers and their families are likely to adjust to foreign cultures. For example, Prudential Relocation Management’s international division has developed an “Overseas Assignment Inventory” to assess a spouse and family’s open-mindedness, respect for others’ beliefs, sense of humor, and marital communication. Likewise, AMP, based in Pennsylvania, conducts extensive psychological screening on expatriates and their spouses when making international assignments. But adaptability screening does not just involve a company assessing an employee; it can also involve an employee screening international assignments for desirability. Since more employees are becoming aware of the costs of international assignments (spouses having to give up or change jobs, children having to change schools,
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R E A L L Y
W O R K S
Cross-Cultural Training Most expatriates will tell you that cross-cultural training helped them adjust to foreign cultures. Such anecdotal data, however, are not as convincing as systematic studies. Twenty-one studies, with a combined total of 1,611 participants, have examined whether cross-cultural training affects the self-development, relationships, perceptions, adjustment, and job performance of expatriates. Overall, they show that crosscultural training works extremely well in most instances.
States at the end of World War II. Americans viewed this as a lack of respect, when, in fact, in Japan turning one’s back in this way is a sign of respect. Cross-cultural training makes a big difference in the accuracy of perceptions concerning host country norms and practices. Expatriates who receive cross-cultural training are 74 percent more likely to have accurate perceptions. Accurate Cultural Perceptions 10%
20%
30%
SELF-DEVELOPMENT
When you first arrive in another country, you must learn how to make decisions that you took for granted in your home country: how to get to work, how to get to the grocery, how to pay your bills, and so on. If you’ve generally been confident about yourself and your abilities, an overseas assignment can challenge that sense of self. Cross-cultural training helps expatriates deal with these and other challenges. Expatriates who receive cross-cultural training are 79 percent more likely to report healthy psychological well-being and self-development than those who don’t receive training. Psychological Well-Being & Self-Development 10%
20%
30%
40%
50%
60%
probability of success
70%
80%
90%
100%
79%
20%
Fostering Relationships with Native Citizens 40%
50%
30%
40%
50%
60%
probability of success
60%
probability of success
70%
80%
70%
80%
90%
100%
74%
Rapid Adjustment to Foreign Cultures and Countries
One of the most important aspects of an overseas assignment is establishing and maintaining relationships with host nationals. If you’re in Brazil, you need to make friends with Brazilians. Many expatriates, however, make the mistake of making friends only with other expatriates from their home country. In effect, they become social isolates in a foreign country. They work and live there, but as much as they can, they speak their native language, eat their native foods, and socialize with other expatriates from their home country. Cross-cultural training makes a big difference in whether expatriates establish relationships with host nationals. Expatriates who receive cross-cultural training are 74 percent more likely to establish such relationships. 30%
60%
New employees are most likely to quit in the first six months because this initial period requires the most adjustment: learning new names, new faces, new procedures, and new information. It’s tough. Of course, expatriates have a much harder time making a successful adjustment because besides learning new names, faces, procedures, and information, expatriates are learning new languages, new foods, new customs, and often new lifestyles. Expatriates who receive crosscultural training are 74 percent more likely to make a rapid adjustment to a foreign country. 10%
20%
50%
RAPID ADJUSTMENT
FOSTERING RELATIONSHIPS
10%
40%
probability of success
90%
100%
74%
ACCURATE PERCEPTIONS OF CULTURE
Another characteristic of successful expatriates is that they understand the cultural norms and practices of the host country. For example, many Americans do not understand the famous pictures of Japanese troops turning their backs to American military commanders on V-J Day, when Japan surrendered to the United
70%
80%
90%
100%
74%
JOB PERFORMANCE
It’s good that cross-cultural training improves selfdevelopment, fosters relationships, improves the accuracy of perceptions, and helps expatriates make rapid adjustments to foreign cultures. From an organizational standpoint, however, the ultimate test of cross-cultural training is whether it improves expatriates’ job performance. The evidence shows that cross-cultural training makes a significant difference in expatriates’ job performance, although the difference is not quite as big as for the other factors. Nonetheless, it is estimated that cross-cultural training for 100 managers could bring about $390,000 worth of benefits to a company, or nearly $4,000 per manager. This is an outstanding return on investment, especially when you consider the high rate of failure for expatriates. Expatriates who have received cross-cultural training are 71 percent more likely to have better on-the-job performance than those who did not receive cross-cultural training.101 On-the-Job Performance 10%
20%
30%
40%
50%
60%
70%
probability of success 71%
80%
90%
100%
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everyone having to learn a new language, etc.), some companies are willing to pay for a preassignment trip to enable the employee and his or her spouse to investigate the country before accepting the international assignment.102 Only 40 percent of expatriates’ families receive language and cross-cultural training, yet such training is just as important for the families of expatriates as for the expatriates themselves.103 In fact, it may be more important because, unlike expatriates, whose professional jobs often shield them from the full force of a country’s culture, spouses and children are fully immersed in foreign neighborhoods and schools. Households must be run, shopping must be done, and bills must be paid. Likewise, children and their parents must deal with different cultural beliefs and practices about discipline, alcohol, dating, and other issues. For example, 15-year-old Holly Timmons from Lilburn, Georgia, fought with her parents about moving to China when her dad’s company, John Deere, gave him a new assignment. In tears, she told him, “No, Dad. I want you to go. I just don’t see why I have to go, too.” Holly began to feel better about moving to China after the company arranged for her to talk to Cee Kung, a 17-year-old Canadian already attending Holly’s new school in China. Holly learned that she would be able to play on the girls’ basketball team, buy her favorite jeans (for less), and still be able to get U.S. fast food. Holly, who had thought about running away from home to avoid the move, said that talking to Cee Kung “took a lot of my fears away. I was worried that school would be a lot harder [in Beijing]. If I hadn’t gotten to talk to Cee . . . I probably would have done something crazy the night before we got [ready] to go.”104 In addition to helping families prepare for the cultural differences they will encounter, language and cross-cultural training can help reduce uncertainty about how to act and decrease misunderstandings between expatriates and their families and locals.
Review 6: Preparing for an International Assignment Many expatriates return prematurely from international assignments because of poor performance. However, this is much less likely to happen if employees receive language and cross-cultural training, such as documentary training, cultural simulations, or field experiences, before going on assignment. Adjustment of expatriates’ spouses and families, which is the most important determinant of success in international assignments, can be improved through adaptability screening and intercultural training.
Key Terms APEC (Asia-Pacific Economic Cooperation), 244 ASEAN (Association of Southeast Asian Nations), 244 CAFTA (Central America Free Trade Agreement) 244 cooperative contract, 248 customs classification, 241 direct foreign investment, 239 expatriate, 260 exporting, 247 franchise, 249 FTAA (Free Trade Area of the Americas), 244
GATT (General Agreement on Tariffs and Trade), 241 global business, 238 global consistency, 246 global new ventures, 252 government import standards, 241 joint venture, 250 licensing, 248 local adaptation, 246 Maastricht Treaty of Europe, 242 multinational corporation, 239 NAFTA (North American Free Trade Agreement), 243 national culture, 257 nontariff barriers, 240
policy uncertainty, 255 political uncertainty, 255 protectionism, 240 purchasing power, 253 quota, 240 regional trading zones, 242 strategic alliance, 250 subsidies, 241 tariff, 240 trade barriers, 240 voluntary export restraints, 240 wholly owned affiliates, 251 World Trade Organization (WTO), 241
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Concept Check 1. What is global business? 2. Describe the impact of global business as it relates to direct foreign investment. 3. List and define the barriers governments erect to control trade. 4. Identify the major trade agreements that govern global trade. 5. What are the tradeoffs between global consistency and local adaptation?
6. Identify the stages in the phase model of globalization and explain the level of risk inherent in each. 7. What is the relationship between the phase model of globalization and global new ventures? 8. What should companies consider when choosing a global location for doing business? 9. Describe Hofstede’s dimensions of national culture. 10. How can companies prepare their managers to be successful expatriate managers?
Self-Assessment ARE YOU NATION-MINDED OR WORLD-MINDED? Attitudes about global business are as varied as managers are numerous. It seems that the business press can always find someone who is for globalization and someone who is against it. But regardless of your opinion on the subject, managers will increasingly confront issues related to the globalization of the business environment. It is probable that, as a manager, you will
need to develop global sensibilities (if you don’t already have them). Understanding your own cultural perspective is the first step in doing so. The Self-Assessment Appendix contains a detailed survey that will reveal your global perspective and give you insights that will provide a baseline as you develop your managerial skills. Turn to page 617 to see if you tend to be more nation-minded or world-minded.
Management Decision ARE STARBUCKS’ EXPANSION PLANS OVERCAFFEINATED? With the seemingly ubiquitous green mermaid peeking out from around street corners across the United States, it’s hard to believe that Starbucks had roughly 1,000 stores overseas before it had stores in all 50 states.105 Although some analysts say the specialty coffee market is saturated, Starbucks thinks the company is still in the early stages of growth. Whichever perspective you lean toward, the numbers are the same. With only 17 stores at the end of 1987, Starbucks boasted over 9,200 stores at the beginning of 2005, and the company has pushed its long-term goal to 30,000 stores. International expansion is a big part of this plan: half of those stores are to be overseas. The company already has nearly 2,500 stores in foreign countries.
Starbucks opened its first overseas store in Toyko in 1996. Asia was chosen as the point of entry because the company decided that the European coffee market was extremely mature and wasn’t going to change much over the years. In contrast, the Asian market was still developing. Starbucks had the opportunity to position itself as the leader of a new industry. And it did. Today, 1,141 of the company’s 2,438 international retail outlets are in Asia. The Pacific Rim, however, is not the only bean in the blend. Starbucks is also aggressively expanding in the Middle East, New Zealand, and Europe. The Brits have long succumbed to the charms of Starbucks, but succeeding in continental Europe may be more difficult. The first store opened there in Zurich in 2001, and new stores in Germany soon followed, with taste-sensitive Italy far down on the list. Most recently, Starbucks has
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Asia-Pacific
Japan China Taiwan South Korea Philippines Malaysia Thailand Australia New Zealand Singapore Indonesia
TOTAL
265
Europe/Middle East/Africa
534 152 136 102 70 52 49 44 36 35 24
1,235
United Kingdom Germany Saudi Arabia United Arab Emirates Spain Kuwait Greece Switzerland Turkey Lebanon Austria Qatar Bahrain France Oman Cyprus
other shops in the district were upset. They posted signs of their own reading, “StarCanada 438 bucks’ invasion of Korea’s Hawaii 45 pride, Insadong.” None-theMexico 32 less, Starbucks doubled the Chile 9 number of stores in Korea Puerto Rico 6 and in China over a two-year Peru 3 period. The French just scoff. “An American chain,” laughs the barman of the Bar du Marché in Paris. “We are unique! This is Paris!” Still, the Starbucks near the iconic Opéra Garnier is bustling. Howard Behar, president of Starbucks International, couldn’t be more pleased that his division was profitable 533 two years ahead of schedule, and he won’t even rule out Italy. “Italy didn’t create coffee,” Behar says. “Nobody owns coffee.” It may be that nobody owns coffee, but Starbucks certainly has a lock on it—in North America and, more and more, around the world. Americas
422 35 32 31 27 27 25 18 15 10 8 6 5 4 3 2 670
Source: Starbucks Annual Report, 2004, 14.
entered France, Turkey, Cyprus, and Peru. Exhibit A shows the operating regions for Starbucks international retail stores in October 2004. Some countries are not very enthusiastic about Starbucks, however. A Chinese newspaper criticized Starbucks for operating a kiosk in Bejing’s Forbidden City. The chamber of commerce in Trieste, home of one of Italy’s most prominent coffee companies, formed an association of historic cafés to seek protection. “Whatever is coming from the States—Cokes, hamburgers—it always seems like an invasion,” says an official of the Trieste chamber. In Seoul, Starbucks opened up shop in the Insadong area of the city, famous for Korean antiques and crafts. Even though the company sign is in Korean—not the standard board in English posted elsewhere around the world—owners of
Questions 1. What risks are associated with Starbucks’ aggressive global expansion plans? 2. What form of global business do you think best describes Starbucks’ stores and products? Why? 3. Starbucks plans to open roughly 450 global locations this year. Should the company continue expanding in countries where it already operates, or should it open stores in new countries? 4. Where did you decide Starbucks should expand? Explain your decision.
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Management Team Decision MEN OR WOMEN, WHO GOES ABROAD? As a member of the regional sales management team for a multinational corporation with offices located on almost every continent, you’ve made some tough decisions throughout your career.106 Unfortunately, you feel that today’s decision might possibly be the team’s hardest yet. Sales in Asia have been dropping lately, and the team has been charged with choosing one of its best salespersons to take over as the new regional manager for that area. Two salespeople immediately come to mind. Laura, one of the potential candidates, has been a sales representative for the North American region for seven years. She has a master’s degree in business administration and was a foreign exchange student in Hong Kong for two years during college. She is extremely competent, knowledgeable, and confident and has consistently been a top performer at the company since she was hired. Adam, the other possible candidate, has been with the North American region for only four years, but he also served three-and-a-half years as a sales representative for the European region of a well-known competitor. He too is qualified, with a master’s degree in business and considerable experience in international assignments, but his performance has not been as good as Laura’s. He’s good, just not as accomplished as she is. Neither candidate speaks any Asian languages. Lingering in the back of your mind is a conversation you had with a colleague a few days ago. You and John, a fellow team member, were discussing international assignments, and the subject of sending women abroad came up. John said that in his experience, women do
not make good expatriate candidates for several reasons. First, they are not as willing as men to take assignments in foreign countries due to family obligations and other personal reasons. Second, women are typically not as successful as men in foreign assignments because certain cultures tend to view women as inferior to men. (Including some Asian cultures, you think to yourself.) Lastly, John said that women are more likely to be subjected to discrimination or sexual harassment than men are. Although you initially agreed with John’s perception, you later concluded that times have changed: after all, the world is much smaller and more culturally diverse today than it was when you went on your first international assignment. You can’t stop thinking about John’s comments, though. You enter the meeting room weighing the pros and cons of each candidate and wondering if Laura would be accepted by her Asian counterparts. To work this Management Team Decision, you will need to assemble a team of four to six students to represent the sales management team in the scenario. Questions 1. Use either the stepladder technique or the nominal group technique (see Chapter 5) to decide which candidate the company should send abroad. Defend your decision. 2. Did the decision-making process change your mind? How so? 3. Determine what, if anything, the company should do to prepare the chosen candidate for the Asian assignment.
Develop Your Career Potential BUILDING CULTURAL BRIDGES INSIDE AMERICAN BUSINESS All savvy managers seem to be familiar with the Japanese custom of exchanging business cards, the French custom of the two-hour lunch, and the South American custom of getting to know potential business partners on a personal level before discussing business.107 But how many managers are aware of the cultural differ-
ences that exist within the United States? For example, how many Manhattanites know that in some parts of the country, businesses close down on the first day of hunting season? Political rhetoric often refers to “two Americas” and the differences between the heartland and the coasts, but many other oppositional geographic pairings also represent different sets of cultural norms.
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Some other obvious examples are North–South, East–West, and the more general urban–rural. How many businesspeople know how to be effective in all these American cultures? Much has been made of the political and cultural implications of these divides, but not enough attention has been paid to what it means for business. Cultural differences were addressed in Chapter 3 (Organizational Environments and Cultures) and will be again in Chapter 15 (Managing Communication). In the context of this chapter, however, it is important to note that many of the issues related to global management are applicable in any geographic context. Deciding whether to locate a firm in Alabama versus Oregon requires the same due diligence as deciding between Madrid and Madagascar. Managers need to assess the best business climate, identify and adapt to cultural differences, and prepare workers who will be transferred to the new location.
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Activities 1. Think of yourself as a member of a particular geographical cultural group. (In the United States, we are conditioned to think of cultural groups based on ethnicity and race, but for this exercise, it’s important to think in terms of location.) What are the characteristics of this group? 2. Once you have an outline of your geographic culture, try to identify the most opposite group to your own. For example, if you consider yourself a New Yorker, you may think of a Mississippian or a Californian. 3. Research regional and local periodicals using the Business and Company Resource Center to learn about the norms in the other culture. You might also talk with a friend who attends college in a different region or state to get a more personal understanding of norms in other parts of the country. List of some of the norms in the other location, and compare them to the norms in your area of the country.
Take Two
Biz Flix Mr. Baseball
The New York Yankees trade aging baseball player Jack Elliot (Tom Selleck) to the Chunichi Dragons, a Japanese team. This lighthearted comedy traces Elliot’s bungling entry into Japanese culture where he almost loses everything including Hiroko Uchiyama (Aya Takanashi). As Elliot slowly begins to understand Japanese culture and Japanese baseball, he finally is accepted by his teammates. This film shows many examples of Japanese culture, especially the Japanese love for baseball. Unknown to Hiroko’s father, she and Jack develop an intimate relationship. Meanwhile, Jack does not know that Hiroko’s father is “The Chief ” (Ken Takakura), the manager of the Chunichi Dragons. This scene takes place after “The Chief ” has removed Jack from a baseball game. The scene shows Jack dining with Hiroko and her grandmother (Mineko Yorozuya), grandfather (Jun Hamamura), and father. What to Watch for and Ask Yourself
1. Does Jack Elliot behave as if he had had cross-cultural training before arriving in Japan? 2. Is he culturally sensitive or insensitive? 3. What do you propose that Elliot do for the rest of his time in Japan?
Management Workplace King Company
David Arnold began his career as a wristwatch salesman, keeping excess inventory in his garage. He developed a strong customer base, expanded his business, and became a powerhouse in wristwatches. Watch the video to see how King Company used global management techniques to grow and prosper. What to Watch for and Ask Yourself
1. King Company is headquartered in the United States and sells products online in the United States. Is it a global business? Why or why not? 2. What forms of global business has King Company used to grow? 3. Given that King Company is based in the United States, does David Arnold have to contend with cultural issues? Explain.
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CHAPTER 9
Designing Adaptive Organizations 270 CHAPTER 10
Managing Teams 304 CHAPTER 11
Managing Human Resource Systems 336 CHAPTER 12
Managing Individuals and a Diverse Work Force 382
Designing Adaptive Organizations
C H A P T E R
O U T L I N E
Chapter9 What Would You Do? Designing Organizational Structures 1. Departmentalization 1.1 1.2 1.3 1.4
Functional Departmentalization Product Departmentalization Customer Departmentalization Geographic Departmentalization 1.5 Matrix Departmentalization
2. Organizational Authority 2.1 2.2 2.3 2.4
Chain of Command Line versus Staff Authority Delegation of Authority Degree of Centralization
3. Job Design 3.1 Job Specialization 3.2 Job Rotation, Enlargement, and Enrichment 3.3 Job Characteristics Model
Designing Organizational Processes 4. Intraorganizational Processes 4.1 Reengineering 4.2 Empowerment 4.3 Behavioral Informality
5. Interorganizational Processes 5.1 Modular Organizations 5.2 Virtual Organizations
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise
Xtra! Four exhibit worksheets, three author FAQs, quiz, Management News, and video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
Yahoo Headquarters, Sunnyvale, California.1 A $100 million loss, plummeting advertising sales, a stock price that has fallen from an all-time high of $237 to less than $10 per share, layoffs that cost 800 people, including the previous CEO, their jobs—welcome to Yahoo. At this once phenomenally successful company, so many basic things have gone wrong that the question is, where do you start to fix it? One key problem is the organizational structure: with just 3,200 employees, Yahoo has 44 different business units. Forty-four! Even General Electric, with 300,000 employees, has only 13. You think to yourself, “This is unmanageable, too many people and no focus.” And amazingly, despite having 44 business units, Yahoo doesn’t have a direct sales unit. No one, it turns out, is responsible for cultivating customers. Why not? Well, during the “go-go” days, customers were literally throwing themselves and their advertising dollars at the company. As one Yahoo manager said, “The fish were jumping into the boat.” Consequently, most orders took place via email. Yahoo didn’t have to establish relationships with customers because customers came to it. Unfortunately, this led to arrogance. Jeff Bell, a vice president at one of Yahoo’s potential customers, DaimlerChrysler, said the message was, “Buy our stuff [meaning Yahoo’s advertising], and shut up.” Jeff Mallett, Yahoo’s former president, said, “We ran Yahoo to optimize market share. I make no apologies for that. If there was a company that didn’t get it [Internet advertising], we moved on very quickly.” Another problem was the overly creative, freewheeling, spontaneous company culture in which everyone, including the CEO, worked in cubicles. The problem wasn’t so much the cubicles, but what they came to represent: an overly informal culture with no controls. At Yahoo, employees played soccer in a large open space outside the company boardroom, even while the board was meeting. Furthermore, no one had an overall perspective of what was best for the entire company. Consequently, said one Yahoo vice president, “[Unit] managers would beg, borrow, and steal from the network [meaning the overall company] to help their own properties.” Plus, if you had an idea, you pursued it without having to
What Would You Do?
get anyone’s feedback or approval. Yahoo’s chief operating officer said, “Yahoo’s original mission was to grow as fast as you can and put things out there and see what works.” The more serious problem, he said, was that “nobody knew what would work.” The most amazing aspect of this culture was that, as one manager explained, “There was a fair amount of resistance toward the strategy of monetizing our businesses.” In other words, the culture at Yahoo was so informal, so unfocused, and so freewheeling that no one really worried about whether the company could charge for the services it provided and make a profit. “There was a fear,” said this manager, “that if all of our efforts were put into profit making, we’d starve research and development and lose our innovation.” Well, back to the original question: With so many basic things wrong, where do you start? With 44 different business units, one clear place to start is by restructuring the organization. But what structure should Yahoo adopt? Should it be a functional, customer, STUDY TIP product, geographic, or matrix structure, and why? Second, Take advantage of all the what should you do about the review opportunities on informal organizational culture, Williams Xtra! Write up a list part of which is critical to innoof questions you have about vation and attracting and concepts you don’t underretaining topflight employees? But, to be effective in the long stand and visit your professor run, Yahoo and its culture need or TA during office hours. to “grow up.” But what does that mean? Finally, too many unrelated decisions are being made by too many unrelated people in the company without any regard for what’s best for the entire company. How can you deal with that problem without squeezing the entrepreneurial thinking and energy out of the company? If you were in charge at Yahoo, what would you do?
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organizational structure The vertical and horizontal configuration of departments, authority, and jobs within a company.
Exhibit 9.1 Microsoft Corporation’s Organizational Chart
No one builds a house without first looking at the design. Put a window there. Take out a wall here. Soon you’ve got the design you want. Only then do you start building. These days, the design of a company is just as important as the design of a house. As Yahoo’s case shows, even the most successful companies can encounter problems if they don’t have the right design. This chapter begins by reviewing the traditional organizational structure approach to organizational design. Organizational structure is the vertical and horizontal configuration of departments, authority, and jobs within a company. For example, Exhibit 9.1 shows Microsoft’s organizational chart. From this chart, you can see the vertical dimensions of the company—who reports to whom, the number of management levels, who has authority over what, and so forth. Founder Bill Gates is the chairman and chief software architect. In this role, Gates focuses on Microsoft’s product and technology strategies. CEO Steve Ballmer reports directly to him.2 Seven group vice presidents, each responsible for one of Microsoft’s seven core businesses, report directly to Ballmer. In turn, each group vice president oversees a number of divisions. For instance, the group vice president for Information Worker works with managers and employees to develop and improve Microsoft’s Office Suite (Word, Excel, PowerPoint, Outlook, and Access), Microsoft Publisher (for business publishing and marketing materials), Microsoft Visio (for drawing and diagramming business and technical concepts), Microsoft Project (project management software), and stand-alone desktop products. The organizational chart also displays Microsoft’s horizontal dimensions— who does what jobs, the number of different departments, and so forth. For instance, in addition to Information Worker, Microsoft’s groups include Windows Client (where software such as Windows XP is written); Business Solutions (accounting and portals); Server and Tools (server software and development tools); Mobile and Embedded Devices (software for handheld computers and mobile phones); MSN (the MSN online network, Internet William H. Gates Chairman & Chief Software Architect Steve Ballmer Chief Executive Officer
Windows Client Business Windows XP Desktop Operating System Windows 2000 Windows Embedded Operating System
Information Worker
Microsoft Office Microsoft Publisher Microsoft Visio Microsoft Project Stand-alone Desktop Products
Microsoft Business Solutions
Great Plains Accounting Software
Server & Tools Microsoft Windows Server System
Navision Business Process Applications
Integrated Server Software
b Central Business Services
Software Developer Tools Microsoft Software Developer Network
Mobile & Embedded Devices
Windows Powered Pocket PC Mobile Explorer Windows Powered Smartphone Software
MSN
Homes & Entertainment
MSN Network
Xbox
MSN Internet Access
Consumer Hardware & Software
MSNTV
Online Games
MSN Hotmail
TV Platform
Other Web-based Services
Source: “Our Commitment to Our Customers: The Business of Microsoft,” Microsoft, [Online] available at http://www.microsoft.com/mscorp/articles/business.asp, 30 April 2005.
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access, TV, Hotmail email services, and other Web-based services); and Homes and Entertainment (Xbox game machine, consumer products, online games, and software for TVs). In the first half of the chapter, you will learn about the traditional vertical and horizontal approaches to organizational structure, including departmentalization, organizational authority, and job design. In the second half of the chapter, you will learn how contemporary organizations are becoming more adaptive by redesigning their internal and external processes. An organizational process is the collection of activities that transform inputs into outputs that customers value.3 For example, Exhibit 9.2 shows the basic internal and external processes that Microsoft uses to write computer software. The process starts when Microsoft gets feedback from customers through Internet newsgroups, email, phone calls, or letters. This information helps Microsoft understand customers’ needs and problems and identify important software issues and needed changes and functions. Microsoft then rewrites the software, testing it internally at the company and then externally through its beta-testing process. In beta testing, early versions of software are distributed to beta testers (i.e., customers who volunteer or are selected by Microsoft), who give the company extensive feedback, which is then used to make improvements. The beta-testing process may take as long as a year and involve thousands of customers. After “final” corrections are made to the software, the company distributes and sells it to customers, who start the process again by giving Microsoft more feedback.
Email
Process View of Microsoft’s Organization Letters
Customer Needs/Problems
Identify Software • Issues • Changes • Functions
Recode Software
Test Software at Microsoft
Beta Testing
Distribute Beta Software to Beta Testers
Changes to Beta Software
Feedback from Beta Testers Distribute & Sell Software to Customers
The collection of activities that transform inputs into outputs that customers value.
Exhibit 9.2
Phone Calls
Internet Newsgroups
organizational process
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This process view of Microsoft, which focuses on how things get done, is very different from the hierarchical view of Microsoft (go back to Microsoft’s organizational chart in Exhibit 9.1), which focuses on accountability, responsibility, and positions within the chain of command. In the second half of the chapter, you will learn how companies are using reengineering, empowerment, and behavioral informality to redesign their internal organizational processes. The chapter ends with a discussion about the ways in which companies are redesigning their external processes, that is, how they are changing to improve their interactions with those outside the company. In that discussion, you will explore the basics of modular and virtual organizations.
Designing Organizational Structures With offices and operations in 58 countries, products in over 200, and more than 150,000 employees worldwide, SaraLee sells some of the best-known brands (SaraLee Foods, Hillshire Farms, and Hanes underwear) in the world. Nevertheless, in hopes of improving company performance, SaraLee is changing its organizational structure to focus on three key customer/geographic markets: North American retail (bakery, packaged meats, and Senseo coffee retail stores), North American Foodservice (bakery goods, and coffee and meats food services), and SaraLee International (bakery and beverage businesses outside North America and global household products). As a result of the restructuring, SaraLee will also sell its $1.1 billion European meats business, its $450 million direct selling business, and its $300 million retail coffee business (Chock Full o’Nuts, Hills Bros., etc.).4 Why would a large company like SaraLee with 150,000 employees and $20 billion in annual revenues completely restructure its organizational design? What does it expect to gain from this change? After reading the next three sections, you’ll have a better understanding of the importance of organizational structure because you should be able to 1 describe the departmentalization approach to organizational structure. 2 explain organizational authority. 3 discuss the different methods for job design. 1 departmentalization Subdividing work and workers into separate organizational units responsible for completing particular tasks.
DEPARTMENTALIZATION
Traditionally, organizational structures have been based on some form of departmentalization. Departmentalization is a method of subdividing work and workers into separate organizational units that take responsibility for completing particular tasks.5 For example, Sony Corporation has separate departments or divisions for electronics, music, movies, computer games and game consoles, and theaters.6 Likewise, Bayer, a German-based company, has separate departments or divisions for health care, agriculture, polymers, and plastics.7 Traditionally, organizational structures have been created by departmentalizing work according to five methods: 1.1 functional, 1.2 product, 1.3 customer, 1.4 geographic, and 1.5 matrix.
1.1 Functional Departmentalization functional departmentalization Organizing work and workers into separate units responsible for particular business functions or areas of expertise.
The most common organizational structure is functional departmentalization. Companies tend to use this structure when they are small or just starting out. Functional departmentalization organizes work and workers into separate units responsible for particular business functions or areas of expertise. For example,
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a common set of functions would consist of accounting, sales, marInsurance Company keting, production, and human resources departments. Not all functionally departmentalized companies have the same functions, however. For example, Exhibit 9.3 shows functional strucSales Information Systems tures for an insurance company and an advertising agency. As the orange boxes indicate, both companies have sales, accounting, Accounting Human Resources human resources, and information systems departments. The purple and green boxes indicate the functions that are different. As would Life Insurance Auto Insurance be expected, the insurance company has separate departments for life, auto, home, and health insurance. By contrast, the advertising agency has departments for artwork, creative work, print advertisHome Insurance Health Insurance ing, and radio advertising. So the kind of functional departments in a functional structure depends, in part, on the business or industry a company is in. Advertising Agency Functional departmentalization has some advantages. First, it allows work to be done by highly qualified specialists. While the accountants in the accounting department take responsibility for proSales Information Systems ducing accurate revenue and expense figures, the engineers in research and development can focus their efforts on designing a product that Human Resources Accounting is reliable and simple to manufacture. Second, it lowers costs by reducing duplication. When the engineers in research and developPrint Advertising Art Department ment come up with that fantastic new product, they don’t have to worry about creating an aggressive advertising campaign to sell it. Radio Creative That task belongs to the advertising experts and sales representatives Advertising Department in marketing. Third, with everyone in the same department having similar work experience or training, communication and coordinaExhibit 9.3 tion are less problematic for departmental managers. Functional Departmentalization At the same time, functional departmentalization has a number of disadvantages, too. To start, cross-department coordination can be difficult. Managers and employees are often more interested in doing what’s right for their function than in doing what’s right for the entire organization. A good example is the traditional conflict between marketing and manufacturing. Marketing typically pushes for spending more money to make more products with more accessories and capabilities to meet customer needs. By contrast, manufacturing pushes for fewer products with simpler designs so that manufacturing facilities can ship finished products on time and keep costs within expense budgets. As companies grow, functional departmentalization may also lead to slower decision making and produce managers and workers with narrow experience and expertise.
1.2 Product Departmentalization Product departmentalization organizes work and workers into separate units responsible for producing particular products or services. Exhibit 9.4 shows the product departmentalization structure used by United Technologies. United Technologies is organized along seven different product lines: Carrier (heating, ventilating, and air-conditioning); Chubb (security, monitoring, and fire protection systems); Hamilton Sundstrand (aircraft electrical power generation and distribution systems); Otis (design, manufacture, installation, maintenance, and servicing of elevators and escalators); Pratt & Whitney (commercial and military jet aircraft engines); Sikorsky (military and commercial helicopters); and UTC Power (heating, cooling, and power systems for commercial and industrial applications and fuel cell systems).8 One of the advantages of product departmentalization is that, like functional departmentalization, it allows managers and workers to specialize in one area of expertise. Unlike the narrow expertise and experiences in functional departmentalization, however, managers and workers develop a broader set of
product departmentalization Organizing work and workers into separate units responsible for producing particular products or services.
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experiences and expertise related to an entire product line. Likewise, product departmentalization Carrier Chubb makes it easier for top managers to assess work-unit (heating, ventilating, & (security, monitoring, & air-conditioning) fire protection) performance. For example, because of the clear separation, of their seven different product divisions, Otis Hamilton Sundstrand it is a relatively straightforward process for United (elevators & (aircraft systems) Technologies’ top managers to evaluate each diviescalators) sion’s performance. For instance, United Technologies’ Otis elevators product division outperformed Pratt & Whitney Customer Service (jet aircraft engines) its Pratt & Whitney aircraft engines division. The Engineering divisions had similar revenues—$8.99 billion for Human Resources Otis and $8.3 billion for Pratt & Whitney—but Otis Information Technology Administrative services had a profit of $1.54 billion (a 17 percent profit Legal Communication & margin) compared to just $1.1 billion (a 13 percent Public Relations Maintenance & Field Operations profit margin) for Pratt & Whitney.9 Finally, deciCustomer Service & Support Manufacturing sion making should be faster because managers and E-Business Marketing & Sales workers are responsible for the entire product line Engineering rather than for separate functional departments, and Sourcing & Logistics Enterprise Resource thus there are fewer conflicts (compared to funcPlanning tional departmentalization). Environmental Health & The primary disadvantage of product departSafety Sikorsky mentalization is duplication. For example, you can (helicopters) Facilities & Services see in Exhibit 9.4 that the Otis elevators and Pratt & Whitney divisions both have customer service, Human Resources engineering, human resources, legal, manufacturing, Legal UTC Power and procurement (similar to sourcing and logistics) Manufacturing (commercial heating, cooling, & departments. Duplication like this often results in Procurement power systems) higher costs. Quality A second disadvantage is that it can be difficult Source: United Technologies Corporation 2004 Annual Report, United Technologies, [Online] to achieve coordination across the different product available at http://www.utc.com/annual_reports/2004/2004_ar.pdf, departments. For example, United Technologies 1 May 2005. would probably have difficulty standardizing its Exhibit 9.4 policies and procedures in product departments as different as the Carrier (heatProduct Departmentalization: United ing, ventilating, and air-conditioning) and Sikorsky (military and commercial Technologies helicopters) divisions. United Technologies
1.3 Customer Departmentalization customer departmentalization
Customer departmentalization organizes work and workers into separate units
Organizing work and workers into separate units responsible for particular kinds of customers.
responsible for particular kinds of customers. For example, Exhibit 9.5 shows that Sprint, the telecommunications company, is organized into departments that cater to businesses (local, long-distance, and data and wireless services for U.S. and international businesses); consumers (local, long-distance, and wireless services for individuals, sold separately or bundled together); homes (Sprint Local: local, long-distance, wireless, and high-speed broadband Internet services bundled together for homes where Sprint is the local service provider); and companies requiring supply chain services (North Supply: supply chain integration, logistics networks, distribution centers, and IT systems).10 The primary advantage of customer departmentalization is that it focuses the organization on customer needs rather than on products or business functions. Furthermore, creating separate departments to serve specific kinds of customers allows companies to specialize and adapt their products and services to customer needs and problems. The primary disadvantage of customer departmentalization is that, like product departmentalization, it leads to duplication of resources. Furthermore, as with product departmentalization, it can be difficult to achieve coordination
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Exhibit 9.5
Sprint Corporation
Customer Departmentalization: Sprint Corporation Sprint Business Solutions
Sprint Consumer Solutions
Sprint Local Telecommunications Division
U.S. businesses
Local service
Local service
International businesses
Longdistance service
Long-distance service
Solutions Wireless services
Wireline & wireless services
Local service Longdistance service
Broadband & video services
Sprint North Supply
Supply chain integration Logistics network Distribution centers IT systems
Data & wireless services Source: “Overview,” Sprint, [Online] available at http://www.sprint.com/sprint/fastfacts/overview/index.html, 1 May 2005.
across different customer departments. Finally, the emphasis on meeting customers’ needs may lead workers to make decisions that please customers but hurt the business.
1.4 Geographic Departmentalization Geographic departmentalization organizes work and workers into separate units responsible for doing business in particular geographic areas. For example, Exhibit 9.6 shows the geographic departmentalization used by Coca-Cola Enterprises (CCE), the largest bottler and distributor of Coca-Cola products in the world. (The Coca-Cola Company develops and advertises soft drinks. CCE, which is a separate company with its own stock, buys the soft drink concentrate from the Coca-Cola Company, combines it with other ingredients, and then distributes the final product in cans, bottles, or fountain containers.) As shown in Exhibit 9.6, CCE has two regional groups: North America and Europe. As the table in the exhibit shows, each of these regions would be a sizable company by itself. For example, the European Group alone serves a population of 146 million people in Belgium, Great Britain, France, Luxembourg, Monaco, and the Netherlands; sells one billion cases of soft drinks a year; employs 11,000 people; runs 32 bottling facilities; and has a customer base that drinks an average of 174 soft drinks per year per person. The primary advantage of geographic departmentalization is that it helps companies respond to the demands of different markets. This can be especially important when the company sells in different countries. For example, CCE’s geographic divisions sell products suited to the taste preferences in different countries. CCE bottles and distributes the following products in Europe but not in the United States: Aquarius, Bonaqua, Burn, Canada Dry, Coca-Cola light (which is somewhat different from Diet Coke), Cresta flavors, Five Alive, Kia-Ora, Kinley, Lilt, Malvern, and Oasis.11 Another advantage is that geographic departmentalization can reduce costs by locating unique organizational resources closer to customers. For instance, it is much cheaper for CCE to build
geographic departmentalization Organizing work and workers into separate units responsible for doing business in particular geographic areas.
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bottling plants in Belgium than to bottle Coke in England and then transport it across the English Channel to Belgium. The primary disadvantage of geographic departmentalization is that it can lead to duplication of resources. For example, while it may be necessary to adapt products and marketing to different geographic locations, it’s doubtful that CCE needs significantly different inventory tracking systems from location to location. Also, even more than with the other forms of departmentalization, it can be difficult to coordinate departments that are literally thousands of miles from each other and whose managers have very limited contact with each other.
1.5 Matrix Departmentalization Matrix departmentalization is a hybrid structure in which two or more forms of departmentalization are used together. The most common matrix combines the product and functional forms of departmentalization, but other forms may also Source: “Territories of Operation, 2004 Annual Report,” Coca-Cola Enterprises, [Online] available at be used. Exhibit 9.7 shows the matrix http://ir.cokecce.com/downloads/ar2004.pdf, 1 May 2005. structure used by Citigroup International, which accounts for all of Citigroup’s corporate and consumer banking Exhibit 9.6 Geographic Departmentalization: businesses. Across the top of Exhibit 9.7, you can see that the company uses a Coca-Cola Enterprises geographic/customer structure. Country managers, who are responsible for Citigroup business in a particular country (Citigroup has over 100 country managers), report to CEOs for Corporate or Consumer Businesses in their region matrix departmentalization (North America, excluding Mexico; Mexico; Europe, Middle East, and Africa; A hybrid organizational structure in which two or more forms of Latin America; Japan; Asia Pacific, excluding Japan). Down the left side of departmentalization, most the figure, however, notice that the company is using a product structure for often product and functional, global consumers (credit cards, consumer banking, and consumer finance); are used together. global corporate and investment banking (corporate banking and capital markets); global investment management (private banking, asset management, and international insurance); and global wealth management (private client group and global equity research). The boxes in the figure represent the matrix structure, created by the combination of the geographic/customer and product structures. For example, in the global consumer business in Europe, Middle East, and Africa, country managers in Spain, United Arab Emirates, or Kenya are responsible for developing Citigroup’s credit card, consumer banking, and consumer finance businesses in those countries. Likewise, in the global investment management business in Asia Pacific, country managers in China, Australia, or South Korea are responsible for developing Citigroup’s private banking, asset management, and international insurance businesses in those countries. Several things distinguish matrix departmentalization from the other traditional forms of departmentalization.12 First, most employees report to two bosses, one from each core part of the matrix. For example, in Exhibit 9.7, the French country manager responsible for credit cards, consumer banking, and consumer finance would report to the CEO for Consumer Businesses in Europe, Middle East, and Africa and the group vice president for all Global Consumer
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Citigroup International
Global Consumer • Credit Cards • Consumer Banking • Consumer Finance Global Corporate & Investment Banking • Corporate Banking • Capital Markets Global Investment Management • Private Banking • Asset Management • International Insurance Smith Barney • Private Client Group • Global Equity Research
North America, Excluding Mexico
Mexico
Europe, Middle East, Africa
Latin America
Japan
Asia Pacific, Excluding Japan
CEO, Corporate Businesses
CEO, Corporate Businesses
CEO, Corporate Businesses
CEO, Corporate Businesses
CEO, Corporate Businesses
CEO, Corporate Businesses
CEO, Consumer Businesses
CEO, Consumer Businesses
CEO, Consumer Businesses
CEO, Consumer Businesses
CEO, Consumer Businesses
CEO, Consumer Businesses
Country Managers in Spain, United Arab Emirates, Kenya, etc. • Credit Cards • Consumer Banking • Consumer Finance
Country Managers in China, Australia, South Korea, etc. • Private Banking • Asset Management • International Insurance
Sources: “How Citigroup Is Organized,” Our Businesses, [Online] available at http://www.Citigroup.com/Citigroup/business/index.htm, 1 May 2005; “Citigroup’s Regions,” Our Businesses, [Online] available at http://www.Citigroup.com/Citigroup/business/regions/index.htm, 1 May 2005.
business. Second, by virtue of their hybrid design, matrix structures lead to much more cross-functional interaction than other forms of departmentalization. In fact, while matrix workers are typically members of only one functional department (based on their work experience and expertise), they are also commonly members of several ongoing project, product, or customer groups. Third, because of the high level of cross-functional interaction, matrix departmentalization requires significant coordination between managers in the different parts of the matrix. In particular, managers have the complex job of tracking and managing the multiple demands (project, product, customer, or functional) on employees’ time. The primary advantage of matrix departmentalization is that it allows companies to efficiently manage large, complex tasks like researching, developing, and marketing pharmaceuticals or carrying out complex global businesses such as Citigroup International. Efficiency comes from avoiding duplication. For example, rather than having an entire marketing function for each project, the company simply assigns and reassigns workers from the marketing department as they are needed at various stages of product completion. More specifically, an employee from a department may simultaneously be part of five different ongoing projects, but may be actively completing work on only a few projects at a time. Another advantage is the pool of resources available to carry out large, complex tasks. Because of the ability to quickly pull in expert help from all the functional areas of the company, matrix project managers have a much more diverse set of expertise and experience at their disposal than do managers in the other forms of departmentalization.
Exhibit 9.7 Matrix Departmentalization: Citigroup International
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simple matrix A form of matrix departmentalization in which managers in different parts of the matrix negotiate conflicts and resources.
complex matrix A form of matrix departmentalization in which managers in different parts of the matrix report to matrix managers, who help them sort out conflicts and problems.
The primary disadvantage of matrix departmentalization is the high level of coordination required to manage the complexity involved with running large, ongoing projects at various levels of completion. Matrix structures are notorious for confusion and conflict between project bosses in different parts of the matrix. At Citigroup, such confusion or conflict might occur between managers in the Global Consumer division and the CEOs of Consumer Businesses in Europe, Middle East, and Africa. Disagreements or misunderstandings about schedules, budgets, available resources, and the availability of employees with particular functional expertise are common. Another disadvantage is that matrix structures require much more management skill than the other forms of departmentalization. Because of these problems, many matrix structures evolve from a simple matrix, in which managers in different parts of the matrix negotiate conflicts and resources directly, to a complex matrix, in which specialized matrix managers and departments are added to the organizational structure. In a complex matrix, managers from different parts of the matrix might report to the same matrix manager, who helps them sort out conflicts and problems. Sometimes, however, even these steps aren’t enough to alleviate the problems that can occur in matrix structures. For example, European-based Unilever, maker and marketer of such well-known products as Dove soap, Vaseline Intensive Care lotions, Hellman’s mayonnaise, I Can’t Believe It’s Not Butter, Lipton teas, Wishbone salad dressings, Skippy peanut butter, and Lawry’s seasonings, was run using a complex matrix structure. The company even had dual headquarters in Rotterdam in the Netherlands, and London, England. The confusion and conflict associated with having two sets of management located in two headquarters were so great, however, that Unilever has now switched to just one CEO and one headquarters. In addition, the company has moved to a simpler organizational structure based on geography, with three regional chiefs (in Europe, the Americas, and Asia/Africa), plus two global divisions: foods and soaps.13 Anthony Cescau, the new CEO, said, “We have recognized the need for greater clarity of leadership and we are moving to a simpler leadership structure that will provide a sharper operational focus.”14 In short, because everyone now reports to just one boss, “we have clarified who calls the shots,” said Cescau.
Review 1: Departmentalization There are five traditional departmental structures: functional, product, customer, geographic, and matrix. Functional departmentalization is based on the different business functions or expertise used to run a business. Product departmentalization is organized according to the different products or services a company sells. Customer departmentalization focuses its divisions on the different kinds of customers a company has. Geographic departmentalization is based on the different geographic areas or markets in which the company does business. Matrix departmentalization is a hybrid form that combines two or more forms of departmentalization, the most common being the product and functional forms. There is no “best” departmental structure. Each structure has advantages and disadvantages. 2 authority The right to give commands, take action, and make decisions to achieve organizational objectives.
ORGANIZATIONAL AUTHORITY
The second part of traditional organizational structures is authority. Authority is the right to give commands, take action, and make decisions to achieve organizational objectives.15 Traditionally, organizational authority has been characterized by the following dimensions: 2.1 chain of command, 2.2 line versus staff authority, 2.3 delegation of authority, and 2.4 degree of centralization.
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2.1 Chain of Command JOHN FROSCHAUER/ BLOOMBERG NEWS/ LANDOV
Turn back a few pages to Microsoft’s organizational chart in Exhibit 9.1. If you place your finger on any position in the chart, say, Central Business Services (under Microsoft Business Solutions), you can trace a line upward to the company’s CEO, Steve Ballmer. This line, which vertically connects every job in the company to higher levels of management, represents the chain of command. The chain of command is the vertical line of authority that clarifies who reports to whom throughout the organization. People higher in the chain of command have the right, if they so choose, to give commands, take action, and make decisions concerning activities occurring anywhere below them in the chain. In the following discussion about delegation and decentralization, you will learn that managers don’t always choose to exercise their authority directly.16 One of the key assumptions underlying the chain of command is unity of command, which means that workers should report to just one boss.17 In practical terms, this means that only one person can be in charge at a time. Matrix organizations, in which employees have two bosses, or—as in the Unilever example you just read about—two headquarters, automatically violate this principle. This is one of the primary reasons that matrix organizations are difficult to manage. The purpose of unity of command is to prevent the confusion that might arise when an employee receives conflicting commands from two different bosses. For example, when Bill Gates became chairman of Microsoft (after being CEO) and Steve Ballmer became CEO, there was confusion about the chain of command at Microsoft. In one meeting, Gates approved a budget increase for a project. Ballmer then denied the increase, shouting at Gates, “You put me in charge of the company. Let me run it.”18 With their different styles and approaches, with Gates still widely involved in Microsoft’s daily decisions, and with managers and employees used to deferring to Gates over the 20 years that he was CEO, it’s not surprising that the chain of command was unclear and that Gates and Ballmer had trouble adjusting to their new roles.
When Steve Ballmer took over the CEO position at Microsoft from Bill Gates, the new chain of command was surprisingly unclear. Once they became comfortable with the change, however, the new structure proved to be a success.
chain of command The vertical line of authority that clarifies who reports to whom throughout the organization.
unity of command A management principle that workers should report to just one boss.
2.2 Line versus Staff Authority A second dimension of authority is the distinction between line and staff authority. Line authority is the right to command immediate subordinates in the chain of command. For example, in the Microsoft organizational chart in Exhibit 9.1, CEO Steve Ballmer has line authority over the manager of the Homes and Entertainment Group. Ballmer can issue orders to that group vice president and expect them to be carried out. In turn, the Homes and Entertainment Group vice president can issue orders to the managers in charge of the Xbox, Consumer Hardware and Software, Online Games, and TV Platform divisions and expect them to be carried out. Staff authority is the right to advise, but not command, others who are not subordinates in the chain of command. For example, at Microsoft, a manager in human resources might advise the vice president of MSN on a hiring decision but cannot order him or her to hire a certain applicant. The terms line and staff are also used to describe different functions within the organization. A line function is an activity that contributes directly to creating or selling the company’s products. So, for example, activities that take place within the manufacturing and marketing departments would be considered line functions. A staff function does not contribute directly to creating or selling the company’s products, but instead supports line activities. Accounting, human
line authority The right to command immediate subordinates in the chain of command.
staff authority The right to advise, but not command, others who are not subordinates in the chain of command.
line function An activity that contributes directly to creating or selling the company’s products.
staff function An activity that does not contribute directly to creating or selling the company’s products, but instead supports line activities.
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Manager
Subordinate
Responsibility Authority
resources, and legal services are typical staff functions within an organization. For example, marketing managers might consult with the legal staff to make sure the wording of a particular advertisement is legal.
2.3 Delegation of Authority
Managers can exercise their authority directly by completing the tasks themselves, or they can choose to pass on some of their authority to subordinates. Delegation of authority is the assignment of direct authority Accountability and responsibility to a subordinate to complete tasks for which the Source: C. D. Pringle, D. F. Jennings, & J. G. Longenecker, manager is normally responsible. Managing Organizations: Functions and Behaviors © 1990. When a manager delegates work, three transfers occur, as illustrated Adapted by permission of Pearson Education, Inc., Upper Saddle River, NJ. in Exhibit 9.8. First, the manager transfers full responsibility for the Exhibit 9.8 assignment to the subordinate. Many managers find giving up full responsibilDelegation: Responsibility, ity somewhat difficult. For example, a second reason for the tough transition Authority, and Accountability from Bill Gates to Steve Ballmer as CEO at Microsoft was Gates’s difficulty in completely delegating the CEO job to Ballmer. When it was announced the delegation of authority Ballmer would become CEO, one member of Microsoft’s board said, “Bill is The assignment of direct authority and always going to have a hard time letting go. Steve is going to [have to] rip it out responsibility to a subordinate to of his hands.”19 complete tasks for which the manager Another problem is that managers often fear that the task won’t be done as is normally responsible. well as if they did it themselves. However, one CEO says, “If you can delegate a task to somebody who can do it 75 percent to 80 percent as well as you can today, you delegate it immediately.” Why? The reason is that many tasks don’t need to be done perfectly; they just need to be done. And delegating tasks that someone else can do frees managers to assume other important responsibilities. Sometimes managers delegate “full responsibility” only to later interfere with how the employee is performing the task. “Why are you doing it that way? That’s not the way I do it.” In short, delegating full responsibility means that the employee—not the manager—is now completely responsible for task completion. Second, delegation transfers to the subordinate full authority over the budget, resources, and personnel needed to do the job. To do the job effectively, subordinates must have the same tools and information at their disposal that managers Exhibit 9.9 had when they were responsible for the same task. In other words, for delegation How to Be a More Effective to work, delegated authority must be commensurate with delegated responsibility. Delegator Now that Gates and Ballmer have adjusted to their respective roles as chairman and 1. Trust your staff to do a good job. Recognize that others have the talent CEO, Ballmer has full responsibility as and ability to complete projects. CEO. Simply put, says Gates, “Steve’s the 2. Avoid seeking perfection. Establish a standard of quality and provide a No. 1 guy, and I’m the No. 2 guy. . . . I have time frame for reaching it. a strong voice, a strong recommendation, 3. Give effective job instructions. Make sure employees have enough but Steve has to decide.”20 Moreover, information to complete the job successfully. though the adjustment took time, by dele4. Know your true interests. Delegation is difficult for some people who gating his CEO responsibilities to Ballmer, actually prefer doing the work themselves rather than managing it. Gates has freed himself to do what he does 5. Follow up on progress. Build in checkpoints to help identify potential and loves best—influence technology deciproblems. sions. Gates now spends 65 percent of his 6. Praise the efforts of your staff. time working with development teams on 7. Don’t wait to the last minute to delegate. Avoid crisis management by technology issues. He has thrived since the routinely delegating work. change. Group vice president Jeff Raikes 8. Ask questions, expect answers, and assist employees to help them says, “You can just see the sparkle in his complete the work assignments as expected. eye.” Says Gates, “It’s a nice time.”21 9. Provide the resources you would expect if you were doing an assignment The third transfer that occurs with delyourself. egation is the transfer of accountability. 10. Delegate to the lowest possible level to make the best possible use of The subordinate now has the authority organizational resources, energy, and knowledge. and responsibility to do the job and is then accountable for getting the job done. Source: S. B. Wilson, “Are You an Effective Delegator?” Female Executive, 1 November 1994, 19.
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In other words, managers give subordinates their managerial authority and responsibility in exchange for results. Forbes magazine columnist John Rutledge calls delegation “MBB,” Managing by Belly Button. He says, “The belly button is the person whose belly you point your finger at when you want to know how the work is proceeding, i.e., the person who will actually be accountable for each step. . . . The belly button is not a scapegoat—a person to blame later when things go wrong. He or she is the person who makes sure that things go right.”22 Exhibit 9.9 gives some tips on how to be an effective delegator.
2.4 Degree of Centralization If you’ve ever called a company’s 1-800 number with a complaint or a special request and been told by the customer service representative, “I’ll have to ask my manager,” or “I’m not authorized to do that,” you already know that centralization of authority exists in that company. Centralization of authority is the location of most authority at the upper levels of the organization. In a centralized organization, managers make most decisions, even the relatively small ones. That’s why the customer service representative you called couldn’t make a decision without first asking the manager. If you are lucky, however, you may have talked to a customer service representative at another company who said, “I can take care of that for you right now.” In other words, the person was able to handle your problem without any input from or consultation with company management. Decentralization is the location of a significant amount of authority in the lower levels of the organization. An organization is decentralized if it has a high degree of delegation at all levels. In a decentralized organization, workers closest to problems are authorized to make the decisions necessary to solve the problems on their own. Decentralization has a number of advantages. It develops employee capabilities throughout the company and leads to faster decision making and more satisfied customers and employees. Furthermore, a study of 1,000 large companies found that companies with a high degree of decentralization outperformed those with a low degree of decentralization in terms of return on assets (6.9 percent versus 4.7 percent), return on investment (14.6 percent versus 9.0 percent), return on equity (22.8 percent versus 16.6 percent), and return on sales (10.3 percent versus 6.3 percent). Ironically, however, the same study found that few large companies are actually decentralized. Specifically, only 31 percent of employees in these 1,000 companies were responsible for recommending improvements to management. Overall, just 10 percent of employees received the training and information needed to support a truly decentralized approach to management.23 With results like these, the key question is no longer whether companies should decentralize, but where they should decentralize. One rule of thumb is to stay centralized where standardization is important and to decentralize where standardization is unimportant. Standardization is solving problems by consistently applying the same rules, procedures, and processes. Children’s Orchard is a franchise chain of stores that sells children’s clothing, toys, accessories, and furniture. Under the company’s original management, Children’s Orchard franchisees could buy whatever they wanted, market it as they saw fit, and set their own prices. The result was that Children’s Orchard stores had different merchandise, different marketing promotions, and different management practices. When Walter Hamilton bought the company, he decided that Children’s Orchard could not become a powerful brand name unless there was some standardization from store to store. Consequently, he standardized the purchasing process, requiring the franchisees who owned each store to buy quality merchandise from a list of approved vendors. He also standardized advertising and promotions, producing clip art, predesigned ads, and other promotions materials for franchisees to use.24 As a result of the increased standardization, Children’s Orchard now has consistent promotions and merchandise from store to store.
centralization of authority The location of most authority at the upper levels of the organization.
decentralization The location of a significant amount of authority in the lower levels of the organization.
standardization Solving problems by consistently applying the same rules, procedures, and processes.
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Review 2: Organizational Authority Organizational authority is determined by the chain of command, line versus staff authority, delegation, and the degree of centralization in a company. The chain of command vertically connects every job in the company to higher levels of management and makes clear who reports to whom. Managers have line authority to command employees below them in the chain of command, but have only staff or advisory authority over employees not below them in the chain of command. Managers delegate authority by transferring to subordinates the authority and responsibility needed to do a task; in exchange, subordinates become accountable for task completion. In centralized companies, most authority to make decisions lies with managers in the upper levels of the company. In decentralized companies, much of the authority is delegated to the workers closest to problems, who can then make the decisions necessary for solving the problems themselves. Centralization works best for tasks that require standardized decision making. When standardization isn’t important, decentralization can lead to faster decisions, greater employee and customer satisfaction, and significantly better financial performance. 3
JOB DESIGN
Imagine that McDonald’s decided to pay $50,000 a year to its drive-through window cashiers. That’s $50,000 for saying, “Welcome to McDonald’s. May I have your order please?” Would you take the job? Sure you would. Work a couple of years. Make a hundred grand. Why not? Let’s assume, however, that to get this outrageous salary, you have to be a full-time McDonald’s drive-through window cashier for the next 10 years. Would you still take the job? Just imagine, 40 to 60 times an hour, you repeat the same basic process: 1. “Welcome to McDonald’s. May I have your order please?” 2. Listen to the order. Repeat it for accuracy. State the total cost. “Please drive to the second window.” 3. Take the money. Make change. 4. Give customers drinks, straws, and napkins. 5. Give customers food. 6. “Thank you for coming to McDonald’s.” Could you stand to do the same simple tasks an average of 50 times per hour, 400 times per day, 2,000 times per week, or 8,000 times per month? Few can. Fast-food workers rarely stay on the job more than six months. Indeed, McDonald’s and other fast-food restaurants have well over 100 percent employee turnover each year.25 job design The number, kind, and variety of tasks that individual workers perform in doing their jobs.
In this next section, you will learn about job design—the number, kind, and variety of tasks that individual workers perform in doing their jobs. You will learn 3.1 why companies continue to use specialized jobs like the McDonald’s drive-through job and 3.2 how job rotation, job enlargement, job enrichment, and 3.3 the job characteristics model are being used to overcome the problems associated with job specialization.
3.1 Job Specialization job specialization
Job specialization occurs when a job is composed of a small part of a larger task
A job composed of a small part of a larger task or process.
or process. Specialized jobs are characterized by simple, easy-to-learn steps, low variety, and high repetition, like the McDonald’s drive-through window job described above. One of the clear disadvantages of specialized jobs is that, being so easy to learn, they quickly become boring. This, in turn, can lead to low job satisfaction and high absenteeism and employee turnover, all of which are very costly to organizations.
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BARRY SWEET/ EPA/ LANDOV
Why, then, do companies continue to create and use specialized jobs? The primary reason is that specialized jobs are very economical. Once a job has been specialized, it takes little time to learn and master. Consequently, when experienced workers quit or are absent, the company can replace them with new employees and lose little productivity. For example, next time you’re at McDonald’s, notice the pictures of the food on the cash registers. These pictures make it easy for McDonald’s trainees to quickly learn to take orders. Likewise, to simplify and speed operations, the drink dispensers behind the counter are set to automatically fill drink cups. Put a medium cup below the dispenser. Punch the medium drink button. The soft drink machine then fills the cup to within a half-inch of the top, while that same worker goes to get your fries. At McDonald’s, every task has been simplified in this way. Because the work is designed to be simple, wages can remain low since it isn’t necessary to pay high salaries to attract highly experienced, educated, or trained workers.
This two-window drive-thru in Monroe, Washington, is typical of McDonald's (and other fast-food restaurants) around the country. But even though this way of organizing the work is extremely efficient, it can be less than stimulating for employees.
3.2 Job Rotation, Enlargement, and Enrichment Because of the efficiency of specialized jobs, companies are often reluctant to eliminate them. Consequently, job redesign efforts have focused on modifying jobs to keep the benefits of specialized jobs, while reducing their obvious costs and disadvantages. Three methods—job rotation, job enlargement, and job enrichment—have been used to try to improve specialized jobs.26 In factory work or even some office jobs, many workers perform the same task all day long. For example, if you attach side mirrors in an auto factory, you probably complete this task 45 to 60 times an hour. If you work as the cashier at a grocery store, you check out a different customer every two to three minutes. And if you work as an office receptionist, you may answer and direct phone calls up to 200 times an hour. Job rotation attempts to overcome the disadvantages of job specialization by periodically moving workers from one specialized job to another to give them more variety and the opportunity to use different skills. For example, the office receptionist who does nothing but answer phones could be systematically rotated to a different job, such as typing, filing, or data entry, every day or two. Likewise, the “mirror attacher” in the automobile plant might attach mirrors in the first half of the day’s work shift and then install bumpers during the second half. Because employees simply switch from one specialized job to another, job rotation allows companies to retain the economic benefits of specialized work. At the same time, the greater variety of tasks makes the work less boring and more satisfying for workers. Another way to counter the disadvantages of specialization is to enlarge the job. Job enlargement increases the number of different tasks that a worker performs within one particular job. So, instead of being assigned just one task, workers with enlarged jobs are given several tasks to perform. For example, an enlarged “mirror attacher” job might include attaching the mirror, checking to see that the mirror’s power adjustment controls work, and then cleaning the mirror’s surface. Though job enlargement increases variety, many workers report feeling more stress when their jobs are enlarged. Consequently, many workers view enlarged jobs as simply “more work,” especially if they are not given additional time to complete the additional tasks. Job enrichment attempts to overcome the deficiencies in specialized work by increasing the number of tasks and by giving workers the authority and control to make meaningful decisions about their work.27 At AES, an independent power
job rotation Periodically moving workers from one specialized job to another to give them more variety and the opportunity to use different skills.
job enlargement Increasing the number of different tasks that a worker performs within one particular job.
job enrichment Increasing the number of tasks in a particular job and giving workers the authority and control to make meaningful decisions about their work.
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company that sells electricity to public utilities and steam (for power) to industrial organizations, workers have been given an extraordinary level of authority and control. For example, with his hands still blackened after unloading coal from a barge, employee Jeff Hatch calls a broker to determine which Treasury bills the company should buy to maximize the short-term return on its available cash. Hatch asks his broker, “What kind of rate can you give me for $10 million at 30 days?” When the broker tells him, “6.09 percent,” he responds, “But I just got a 6.13 percent quote from Chase.”28 Indeed, at AES, ordinary plant technicians are given budgets worth several million dollars and are trusted to purchase everything from mops to gas turbines. In most companies, such tasks would only be entrusted to managers, but CEO Dennis Bakke says, “The more you increase individual responsibility, the better the chances for incremental improvements in operations.” Paul Burdick, an engineer entrusted with the ability to purchase billions of dollars of coal agrees, saying, “You’re given a lot of leeway and a lot of rope. You can use it to climb or you can hang yourself.”29
3.3 Job Characteristics Model job characteristics model (JCM) An approach to job redesign that seeks to formulate jobs in ways that motivate workers and lead to positive work outcomes.
internal motivation Motivation that comes from the job itself rather than from outside rewards.
In contrast to job rotation, job enlargement, and job enrichment, which focus on providing variety in job tasks, the job characteristics model (JCM) is an approach to job redesign that seeks to formulate jobs in ways that motivate workers and lead to positive work outcomes.30 As shown in Exhibit 9.10, the primary goal of the model is to create jobs that result in positive personal and work outcomes such as internal work motivation, satisfaction with one’s job, and work effectiveness. Of these, the central concern of the JCM is internal motivation. Internal motivation is motivation that comes from the job itself rather than from outside rewards, such as a raise or praise from the boss. If workers feel that performing the job well is itself rewarding, then the job has internal motivation. Statements such as “I get a nice sense of accomplishment” or “I feel good about myself and what I’m producing” are examples of internal motivation. Moving to the left in Exhibit 9.10, you can see that the JCM specifies three critical psychological states that must occur for work to be internally motivating. First, workers must experience the work as meaningful; that is, they must
Exhibit 9.10 Job Characteristics Model
Redesigning Jobs
Core Job Characteristics
Critical Psychological States
Personal & Work Outcomes
Combining Tasks Skill Variety Forming Natural Work Units Establishing Client Relationships Vertically Loading the Job
Task Identity
Task Significance
Autonomy
Feedback Opening Feedback Channels
Experienced Meaningfulness of the Work Experienced Responsibility for the Outcomes of Work Knowledge of the Actual Results of Work Activity
High Internal Work Motivation High “Growth” Satisfaction High General Job Satisfaction High Work Effectiveness
Source: J. R. Hackman and G. R. Oldham, Work Redesign (Reading, MA: Addison-Wesley, 1980). Reprinted by permission of Addison-Wesley Longman.
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view their job as being important. Second, they must experience responsibility for work outcomes—they must feel personally responsible for the work being done well. Third, workers must have knowledge of results; that is, they must know how well they are performing their jobs. All three critical psychological states must occur for work to be internally motivating. For example, let’s return to our grocery store cashier. Cashiers usually have knowledge of results. When you’re slow, your checkout line grows long. If you make a mistake, customers point it out: “No, I think that’s on sale for $2.99, not $3.99.” Likewise, cashiers experience responsibility for work outcomes. At the end of the day, the register is totaled and the money is counted. Ideally, the money matches the total sales in the register. If the money in the till is less than what’s recorded in the register, most stores make the cashier pay the difference. Consequently, most cashiers are very careful to avoid being caught “short” at the end of the day. Nonetheless, despite knowing the results and experiencing responsibility for work outcomes, most grocery store cashiers (at least where I shop) aren’t internally motivated because they don’t experience the work as meaningful. With scanners, it takes little skill to learn or do the job. Anyone can do it. In addition, cashiers have few decisions to make, and the job is highly repetitive. Of course, this raises the question: What kinds of jobs produce the three critical psychological states? Again, moving to the left in Exhibit 9.10, the JCM specifies that the three critical psychological states arise from jobs that are strong on five core job characteristics: skill variety, task identity, task significance, autonomy, and feedback. Skill variety is the number of different activities performed in a job. Task identity is the degree to which a job, from beginning to end, requires completion of a whole and identifiable piece of work. Task significance is the degree to which a job is perceived to have a substantial impact on others inside or outside the organization. Autonomy is the degree to which a job gives workers the discretion, freedom, and independence to decide how and when to accomplish the work. Finally, feedback is the amount of information the job provides to workers about their work performance. To illustrate how the core job characteristics work together, let’s use them to more thoroughly assess why the McDonald’s drive-through window job is not particularly satisfying or motivating. To start, skill variety is low. Except for the size of an order or special requests (no onions), the process is the same for each customer. At best, task identity is moderate. Although you take the order, handle the money, and deliver the food, others are responsible for a larger part of the process—preparing the food. Task identity will be even lower if the McDonald’s has two drive-through windows because each drive-through window worker will have an even more specialized task. The first is limited to taking the order and making change, while the second just delivers the food. Task significance, the impact you have on others, is probably low. Autonomy is also very low. McDonald’s has strict rules about dress, cleanliness, and procedures. But the job does provide immediate feedback, such as positive and negative customer comments, car horns honking, the amount of time it takes to process orders, and the number of cars in the drive-through. With the exception of feedback, the low levels of the core job characteristics show why the drive-through window job is not internally motivating for many workers. What can managers do when jobs aren’t internally motivating? The far left column of Exhibit 9.10 lists five job redesign techniques that managers can use to strengthen a job’s core characteristics. Combining tasks increases skill variety and task identity by joining separate, specialized tasks into larger work modules. For example, some trucking firms are now requiring truck drivers to load their rigs as well as drive them. The hope is that involving drivers in loading will ensure that trucks are properly loaded, thus reducing damage claims.
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skill variety The number of different activities performed in a job.
task identity The degree to which a job, from beginning to end, requires the completion of a whole and identifiable piece of work.
task significance The degree to which a job is perceived to have a substantial impact on others inside or outside the organization.
autonomy The degree to which a job gives workers the discretion, freedom, and independence to decide how and when to accomplish the job.
feedback The amount of information the job provides to workers about their work performance.
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Work can be formed into natural work units by arranging tasks according to logical or meaningful groups. Although many trucking companies randomly assign drivers to trucks, some have begun assigning drivers to particular geographic locations (e.g., the Northeast or Southwest) or to truckloads that require special driving skill when being transported (e.g., oversized loads, chemicals, etc.). Forming natural work units increases task identity and task significance. Establishing client relationships increases skill variety, autonomy, and feedback by giving employees direct contact with clients and customers. In some companies, truck drivers are expected to establish business relationships with their regular customers. When something goes wrong with a shipment, customers are told to call drivers directly. Vertical loading means pushing some managerial authority down to workers. For truck drivers, this means that they have the same authority as managers to resolve customer problems. In some companies, if a late shipment causes problems for a customer, the driver has the ability to fully refund the cost of that shipment (without first obtaining management’s approval). The last job redesign technique offered by the model, opening feedback channels, means finding additional ways to give employees direct, frequent feedback about their job performance. For example, with advances in electronics, many truck drivers get instantaneous data as to whether they’re on schedule and driving their rigs in a fuel-efficient manner. Likewise, the increased contact with customers also means that many drivers now receive monthly data on customer satisfaction. For additional information on the JCM, see this chapter’s “What Really Works” feature.
Review 3: Job Design Companies use specialized jobs because they are economical and easy to learn and don’t require highly paid workers. However, specialized jobs aren’t motivating or particularly satisfying for employees. Companies have used job rotation, job enlargement, job enrichment, and the job characteristics model to make specialized jobs more interesting and motivating. With job rotation, workers move from one specialized job to another. Job enlargement simply increases the number of different tasks within a particular job. Job enrichment increases the number of tasks in a job and gives workers authority and control over their work. The goal of the job characteristics model is to make jobs intrinsically motivating. For this to happen, jobs must be strong on five core job characteristics (skill variety, task identity, task significance, autonomy, and feedback), and workers must experience three critical psychological states (knowledge of results, responsibility for work outcomes, and meaningful work). If jobs aren’t internally motivating, they can be redesigned by combining tasks, forming natural work units, establishing client relationships, vertical loading, and opening feedback channels. mechanistic organization An organization characterized by specialized jobs and responsibilities, precisely defined, unchanging roles, and a rigid chain of command based on centralized authority and vertical communication.
organic organization An organization characterized by broadly defined jobs and responsibility, loosely defined, frequently changing roles, and decentralized authority and horizontal communication based on task knowledge.
Designing Organizational Processes More than 40 years ago, Tom Burns and G. M. Stalker described how two kinds of organizational designs, mechanistic and organic, are appropriate for different kinds of organizational environments.31 Mechanistic organizations are characterized by specialized jobs and responsibilities, precisely defined, unchanging roles, and a rigid chain of command based on centralized authority and vertical communication. This type of organization works best in stable, unchanging business environments. By contrast, organic organizations are characterized by broadly defined jobs and responsibility, loosely defined, frequently changing roles, and decentralized authority and horizontal communication based on task knowledge. This type of organization works best in dynamic, changing business environments.
W H A T
R E A L L Y
W O R K S
The Job Characteristics Model: Making Jobs More Interesting and Motivating Think of the worst job you ever had. Was it factory work where you repeated the same task every few minutes? Was it an office job requiring a lot of meaningless paperwork? Or was it a job so specialized that it took no effort or thinking whatsoever to do? The job characteristics model reviewed in this chapter suggests that workers will be more motivated or satisfied with their work if their jobs have greater task identity, task significance, skill variety, autonomy, and feedback. Eighty-four studies, with a combined total of 22,472 participants, found that, on average, these core job characteristics make jobs more satisfying for most workers. In addition, jobs rich with the five core job characteristics are especially satisfying for workers who possess an individual characteristic called growth need strength. Read on to see how well the JCM really increases job satisfaction and reduces workplace absenteeism. JOB SATISFACTION
There is a 66 percent chance that workers will be more satisfied with their work when their jobs have task identity, the chance to complete an entire job from beginning to end, than when they don’t. 10% 20% 30% 40% 50%
probability of success
60% 70% 80% 90% 100%
66%
On average, there is a 69 percent chance that workers will be more satisfied with their work when their jobs have task significance, meaning a substantial impact on others, than when they don’t.
10% 20% 30% 40% 50% 60% 70%
probability of success
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
probability of success
70%
The statistics presented above indicate that, on average, the JCM has, at worst, a 66 percent chance of improving workers’ job satisfaction. In all, this is impressive evidence that the model works. In general, you can expect these results when redesigning jobs based on the model. We can be more accurate about the effects of the JCM, however, if we split workers into two groups: those with high growth need strength and those with low growth need strength. Growth need strength is the need or desire to achieve personal growth and development through one’s job. Workers high in growth need strength respond well to jobs designed according to the JCM because they enjoy work that challenges them and allows them to learn new skills and knowledge. In fact, there is an 84 percent chance that workers with high growth need strength will be more satisfied with their work when their jobs are redesigned according to the JCM. 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
probability of success
84%
69%
On average, there is a 70 percent chance that workers will be more satisfied with their work when their jobs have skill variety, meaning a variety of different activities, skills, and talents, than when they don’t. 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
probability of success
73%
On average, there is a 70 percent chance that workers will be more satisfied with their work when their jobs provide feedback, meaning information about their work performance, than when they don’t.
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
probability of success
80% 90% 100%
By comparison, because they aren’t as interested in being challenged or learning new things at work, there is only a 69 percent chance that workers low in growth need strength will be satisfied with jobs that have been redesigned according to the principles of the JCM. This is still a favorable percentage, but it is weaker than the 84 percent chance of job satisfaction that occurs for workers high in growth need strength.
70% 10%
On average, there is a 73 percent chance that workers will be more satisfied with their work when their jobs have autonomy, meaning the discretion to decide how and when to accomplish the work, than when they don’t.
20% 30% 40% 50% 60% 70% 80% 90% 100%
probability of success
69%
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WORKPLACE ABSENTEEISM
Although not shown in the job characteristics model displayed in Exhibit 9.10, workplace absenteeism is an important personal or work outcome affected by a job’s core job characteristics. In general, the “richer” your job is with task identity, task significance, skill variety, autonomy, and feedback, the more likely you are to show up for work every day. Workers are 63 percent more likely to attend work when their jobs have task identity than when they don’t. 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Workers are 68 percent more likely to attend work when their jobs have task significance than when they don’t. 50% 60% 70% 80% 90% 100%
probability probability of of success success
10% 20% 30%
40% 50% 60% 70% 80% 90% 100%
probability of success
72%
Workers are 74 percent more likely to attend work when their jobs have autonomy than when they don’t. 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
probability of success
probability of success 63%
10% 20% 30% 40%
Workers are 72 percent more likely to attend work when their jobs have skill variety than when they don’t.
68% 72%
74%
Workers are 72 percent more likely to attend work when their jobs provide feedback than when they don’t.32 10% 20% 30% 40% 50% 60%
probability of success
70% 80% 90% 100%
72%
The organizational design techniques described in the first half of this chapter—departmentalization, authority, and job design—are better suited for mechanistic organizations and the stable business environments that were more prevalent before 1980. In contrast, the organizational design techniques discussed here in the second part of the chapter are more appropriate for organic organizations and the increasingly dynamic environments in which today’s businesses compete. The key difference between these approaches is that whereas mechanistic organizational designs focus on organizational structure, organic organizational designs are concerned with organizational process, the collection of activities that transform inputs into outputs valued by customers. After reading the next two sections, you should be able to 4 5
4 intraorganizational process The collection of activities that take place within an organization to transform inputs into outputs that customers value.
explain the methods that companies are using to redesign internal organizational processes (i.e., intraorganizational processes). describe the methods that companies are using to redesign external organizational processes (i.e., interorganizational processes).
INTRAORGANIZATIONAL PROCESSES
An intraorganizational process is the collection of activities that take place within an organization to transform inputs into outputs that customers value. The steps involved in an automobile insurance claim are a good example of an intraorganizational process: 1. Document the loss (i.e., the accident). 2. Assign an appraiser to determine the dollar amount of damage. 3. Make an appointment to inspect the vehicle.
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4. 5. 6. 7.
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Inspect the vehicle. Write an appraisal and get the repair shop to agree to the damage estimate. Pay for the repair work. Return the repaired car to the customer.
Let’s take a look at how companies are using 4.1 reengineering, 4.2 empowerment, and 4.3 behavioral informality to redesign internal organizational processes like these.
4.1 Reengineering In their best-selling book Reengineering the Corporation, Michael Hammer and James Champy defined reengineering as “the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed.”33 Hammer and Champy further explained the four key words shown in italics in this definition. The first key word is fundamental. When reengineering organizational designs, managers must ask themselves, “Why do we do what we do?” and “Why do we do it the way we do?” The usual answer is, “Because that’s the way we’ve always done it.” The second key word is radical. Reengineering is about significant change, about starting over by throwing out the old ways of getting work done. The third key word is processes. Hammer and Champy noted that “most business people are not process oriented; they are focused on tasks, on jobs, on people, on structures, but not on processes.” The fourth key word is dramatic. Reengineering is about achieving “quantum” improvements in company performance. An example from IBM Credit’s operation illustrates how work can be reengineered.34 IBM Credit loans businesses money to buy IBM computers. Previously, the loan process began when an IBM salesperson called to obtain credit approval for a customer’s purchase. The first department involved in the process took the credit information over the phone from the salesperson and recorded it on the credit form. Then, the credit form was sent first to a separate credit checking department, then to a separate pricing department (where the interest rate was determined), and so on. In all, it took five departments six days to approve or deny the customer’s loan. Of course, this delay cost IBM business. Some customers got their loans elsewhere. Others, frustrated by the wait, simply canceled their orders. Finally, two IBM managers decided to walk a loan straight through to each of the five departments involved in the process. At each step, they asked the workers to stop what they were doing and immediately process their loan application. They were shocked by what they found. From start to finish, the entire process took just 90 minutes! It turned out that the average time of six days occurred because of delays in handing off the work from one department to another. The solution: IBM redesigned the process so that one person, not five in five separate departments, handled the entire loan approval process without any handoffs. The results were “dramatic.” Reengineering the credit process reduced approval time from six days to four hours and allowed IBM Credit to increase the number of loans it handled by a factor of 100! Reengineering changes an organization’s orientation from vertical to horizontal. Instead of “taking orders” from upper management, lower- and middle-level managers and workers “take orders” from a customer who is at the beginning and end of each process. Instead of running independent functional departments, managers and workers in different departments take ownership of cross-functional processes. Instead of simplifying work so that it becomes increasingly specialized, reengineering complicates work by giving workers increased autonomy and responsibility for complete processes.
reengineering Fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical measures of performance, such as cost, quality, service, and speed.
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Pooled Interdependence
Reciprocal Interdependence
Finished Product
Sequential Interdependence Finished Product
Exhibit 9.11 Reengineering and Task Interdependence
task interdependence The extent to which collective action is required to complete an entire piece of work.
pooled interdependence Work completed by having each job or department independently contribute to the whole.
sequential interdependence Work completed in succession, with one group’s or job’s outputs becoming the inputs for the next group or job.
reciprocal interdependence Work completed by people performing different jobs or groups working together in a back-and-forth manner.
In essence, reengineering changes work by changing task interdependence, the extent to which collective action is required to
complete an entire piece of work. As shown in Exhibit 9.11, there are three kinds of task interdependence.35 In pooled interdependence, each job or department independently contributes to the whole. In sequential interdependence, work must be performed in succession, as one group’s or job’s outputs become the inputs for Finished the next group or job. Finally, in reciprocal interdependence, differProduct ent jobs or groups work together in a back-and-forth manner to complete the process. By reducing the handoffs between different jobs or groups, reengineering decreases sequential interdependence. Likewise, reengineering decreases pooled interdependence by redesigning work so that formerly independent jobs or departments now work together to complete processes. Finally, reengineering increases reciprocal interdependence by making groups or individuals responsible for larger, more complete processes in which several steps may be accomplished at the same time. As an organizational design tool, reengineering promises big rewards, but it has also come under severe criticism. The most serious complaint is that because it allows a few workers to do the work formerly done by many, reengineering is simply a corporate code word for cost cutting and worker layoffs.36 Likewise, for that reason, detractors claim that reengineering hurts morale and performance. For example, even though ordering times were reduced from three weeks to three days, Levi Strauss ended an $850 million reengineering project because of the fear and turmoil it created in the company’s work force. One low point occurred when Levi management, encouraged by its reengineering consultants, told 4,000 workers that they would have to “reapply for their jobs” as the company shifted from its traditional vertical structure to a process-based form of organizing. Thomas Kasten, Levi’s vice president for reengineering and customer service, said, “We felt the pressure building up [over reengineering efforts], and we were worried about the business.”37 Today, even reengineering gurus Hammer and Champy admit that roughly 70 percent of all reengineering projects fail because of the effects on people in the workplace. Says Hammer, “I wasn’t smart enough about that [the people issues]. I was reflecting my engineering background and was insufficiently appreciative of the human dimension. I’ve learned [now] that’s critical.”38
4.2 Empowerment empowering workers Permanently passing decision-making authority and responsibility from managers to workers by giving them the information and resources they need to make and carry out good decisions.
Another way of redesigning interorganizational processes is through empowerment. Empowering workers means permanently passing decision-making authority and responsibility from managers to workers. For workers to be fully empowered, however, companies must give them the information and resources they need to make and carry out good decisions, and then reward them for taking individual initiative.39 Unfortunately, this doesn’t happen often enough. As Michael Schrage, author and MIT researcher, wrote: A warehouse employee can see on the intranet that a shipment is late but has no authority to accelerate its delivery. A project manager knows—and can mathematically demonstrate—that a seemingly minor spec change will bust both her budget and her schedule. The spec must be changed anyway. An airline reservations agent tells the Executive Platinum Premier frequent flier that first class appears wide open for an upgrade. However, the airline’s yield management software won’t permit any upgrades until just four hours before the flight, frequent fliers (and reservations) be damned. In all these cases, the employee has access to valuable information. Each one possesses the “knowledge” to do the job better. But the knowledge and information are irrelevant
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and useless. Knowledge isn’t power; the ability to act on knowledge is power.40 When workers are given the proper information and resources and are allowed to make good decisions, they experience strong feelings of empowerment. Empowerment is a feeling of intrinsic motivation, in which workers perceive their work to have meaning and perceive themselves to be competent, having an impact, and capable of self-determination.41 Work has meaning when it is consistent with personal standards and beliefs. Workers feel competent when they believe they can perform an activity with skill. The belief that they are having an impact comes from a feeling that they can affect work outcomes. A feeling of self-determination arises from workers’ belief that they have the autonomy to choose how best to do their work. Empowerment can lead to changes in organizational processes because meaning, competence, impact, and self-determination produce empowered employees who take active, rather than passive, roles in their work. At CSX, a large railroad company, accidents, such as knocking railroad cars off the tracks or into each other, were all too common. When they occurred, management would typically charge employees with wrongdoing and often dismiss them from their jobs. In an abrupt turn, CSX has now empowered employees to be completely responsible for safety. Employees, rather than managers, elect other employees to safety committees that are responsible for reviewing accidents. And, instead of charging and dismissing employees who commit accidents, those employee-run committees now sit down with the employees who were involved in accidents to “casually discuss” what happened. In most cases, the employees return to their jobs unpunished. Fearing the company had gone soft, veteran managers expected accident rates to rise. Instead, accident rates decreased by 20 percent, and suspensions and dismissals fell from 70 to 24 in the first year after CSX empowered employees to improve company safety.42
empowerment Feelings of intrinsic motivation, in which workers perceive their work to have impact and meaning and perceive themselves to be competent and capable of self-determination.
4.3 Behavioral Informality How would you describe the atmosphere in the office where you last worked? Was it a formal, by-the-book, follow-the-rules, address-each-other-by-lastnames atmosphere? Or was it more informal, with an emphasis on results rather than rules, casual business dress rather than suits, and first names rather than last names and titles? Or was it somewhere in between? Behavioral informality (or formality) is a third influence on intraorganizational processes. Behavioral informality refers to workplace atmospheres characterized by spontaneity, casualness, and interpersonal familiarity. By contrast, behavioral formality refers to workplace atmospheres characterized by routine and regimen, specific rules about how to behave, and impersonal detachment. As Exhibit 9.12 shows, behavioral formality and informality are characterized by four factors: language usage, conversational turn taking and topic selection, emotional and proxemic gestures, and physical and contextual cues. Let’s examine each in more detail.43 Compared to formal work atmospheres, the language in informal workplaces is often slurred (“Whatcha doin’?”), elliptical (“Coffee?” versus “Would you like some coffee?”), and filled with slang terms and vivid descriptions. People use first names and perhaps nicknames to address each other, rather than Mr., Ms., Dr., or formal titles. When it comes to conversations in informal workplaces, people jump right in when they have something to say (i.e., unregulated turn taking); conversations shift from topic to topic, many of which are unrelated to business; and joking and laughter are common. From joy to disappointment, people show much more emotion in informal workplaces. Relaxed behavior, such as putting your feet on your desk or congregating in hallways for
behavioral informality A workplace atmosphere characterized by spontaneity, casualness, and interpersonal familiarity.
behavioral formality A workplace atmosphere characterized by routine and regimen, specific rules about how to behave, and impersonal detachment.
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FORMAL
INFORMAL
LANGUAGE USAGE
Fully articulated speech (“What are you doing?”) Grammatically complete phrasing (“Would you like some coffee?”) Use of formal word choices (“Would you care to dine?”) Use of honorifics (“Ms.,” “Sir,” “Dr.”) Elimination of “I” and “you” (“It is requested that. . . “)
Phonological slurring (“Whatcha doin’?”) Use of elliptical expressions (“Coffee?”) Use of colloquial and slang expressions (“Wanna grab a bite to eat?”) Use of the vivid present (“So I come down the stairs, and she says . . . “) First name, in-group names (“Mac,” “Bud”)
CONVERSATIONAL
TURN TAKING AND TOPIC SELECTION
Turn taking well regulated Few interruptions or overlaps Few changes of topic Seriousness of topic
Turn taking relatively unregulated Many interruptions or overlaps Many shifts of topic possible Joking or conversational levity possible
EMOTIONAL AND PROXEMIC GESTURES
Sober facial demeanor Much interpersonal distance No touching, postural attention
Greater latitude of emotional expression Small interpersonal distance Touching, postural relaxation allowed
PHYSICAL AND CONTEXTUAL CUES
Formal clothing, shoes, etc. Central focus of attention Symmetric arrangement of chairs/furniture Artifacts related to official status Hushed atmosphere, little background noise
Informal clothing, shoes, etc. Decentralized, multiple centers of attention possible Asymmetric arrangement of chairs/furniture Informal trappings: flowers, art, food, soft furniture Background noise acceptable
Source: Republished with permission of Academy of Management, P.O. Box 3020, Briar Cliff Manor, NY, 10510-8020. D. A. Morland, “The Role of Behavioral Formality and Informality in the Enactment of Bureaucratic versus Organic Organizations,” Academy of Management Review 20 (1995): 831–872. Reproduced by permission of the publisher via Copyright Clearance Center, Inc.
Exhibit 9.12 Differences between Formal and Informal Workplaces.
impromptu discussions, is more common, too. In terms of physical and contextual cues, informal workplaces de-emphasize differences in hierarchical status or rank to encourage more frequent interaction between organizational members. Consequently, to make their organizations feel less formal, many companies have eliminated such “management perks,” as executive dining rooms, reserved parking spaces, and large corner offices separated from most workers by virtue of their location on a higher floor of the company building (the higher the floor, the greater one’s status). Casual dress policies and open office systems are two of the most popular methods for increasing behavioral informality. In fact, a survey conducted by the Society for Human Resource Management indicates that casual dress policies (no suits, ties, jackets, dresses, or formal clothing required) are extremely popular.44 Today, 86 percent of companies have some form of casual dress code compared to 63 percent 7 years ago and 24 percent 12 years ago.45 Similarly, 42 percent of all companies permit casual dress at least one day a week compared to 17 percent five years ago. Moreover, 33 percent of companies permit casual dress every day of the week, up from 20 percent seven years ago. Although sales of formal business wear, such as men’s suits, increased last year for the first time in eight years and some companies, such as retailer Target Corporation, have instituted formal dress codes that ban “business casual,” “no study shows that productivity goes up with better dress,” says John Challenger, chief executive of Challenger, Gray & Christmas, Inc., a Chicago-based outplacement company.46 Indeed, compared to formal dress, casual dress appears to improve employee attitudes. For example, Colin Stanbridge, the chief executive of London’s Chamber of Commerce, said, “People tend to work at their best when they feel most comfortable. And today I think the vast majority of people feel at their most comfortable when wearing casual dress.”47 In fact, 85 percent of human resources directors believe that casual dress can improve office morale, and 79 percent say that employees are very satisfied with casual dress codes.48 Moreover, nearly two-thirds of the human resources directors believe that casual dress policies are an important tool for attracting qualified
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employees in tight labor markets. Michael Losey, president of the Society for Human Resource Management, concludes that “for the majority of corporations and industries, allowing casual dress can have clear advantages at virtually no cost.”49 While casual dress increases behavioral informality by having managers and workers at all levels dress in a more relaxed manner, open office systems increase behavioral informality by significantly increasing the level of communication and interaction among employees. By definition, open office systems try to increase interaction by removing physical barriers that separate workers. One characteristic of open office systems is that they have much more shared space than private space. Shared spaces are areas used by and open to all employees. Cubicles with lowto-the-ground partitions (used by 75 percent of office workers), offices with no doors or with glass walls, collections of comfortable furniture that encourage people to congregate, and common areas with tables and chairs that encourage people to meet, work, or eat together are examples of shared space.50 In contrast, private spaces, such as private offices with doors, are used by and open to just one employee. The advantage of an open office with extensive shared space is that it dramatically increases the amount of unplanned, spontaneous, and chance communication between employees.51 People are much more likely to plan meetings and work together when numerous “collaboration spaces” with conference tables, white boards, and computers are readily available. With no office walls, inviting common areas, and different departments mixed together in large open spaces, spontaneous communication occurs more often. After Radio Shack moved from two traditional, 19-story office towers into a new headquarters with open offices, cubicles, and immense amounts of shared space, the volume of corporate email dropped by 37 percent because people were much more likely to run into and actually talk to each other. Senior vice president Laura Moore says, “For somebody to stick his or her head over your workplace [cubicle] is accepted protocol. That has made [Radio Shack] executives much more approachable.”52 Also, open office systems increase chance encounters by making it much more likely that people from different departments or areas will run into each other. When Sigma-Aldrich, a biotechnology firm, built a new office with a three-story, open air staircase at the center of the building, the main goal, according to Keld Sorensen, director of research and development, was increasing “interaction.”53 In fact, the open staircase, which is complemented by benches and expansive landings (so people would sit and talk) on each story has led to 156 percent more chance encounters compared to the old building, which had elevators and an enclosed stairwell. Indeed, soon after the move to the new office, two scientists from opposite sides of the building ran into each other on the stairs, stopped to talk, and ended up generating a significant new reagent for scientific testing. Not everyone is enthusiastic about open offices, however. For example, Ingrid Tischer, who sits in a cubicle next to the kitchen in her office, says she can’t help overhearing others’ conversations and frequently joins in. Because of the location of her cubicle, “I know things about my colleagues’ lives, and they know things about mine.”54 In fact, cubicle dwellers are interrupted by “noise, visual distractions, and chatty visitors” up to 21 times a day. And, since it takes about three minutes each time to refocus on what you were doing, cubicle workers can lose an hour a day to these interruptions.55 Attorney Phillip Fisher says, “I honestly don’t know how people can concentrate in a cubicle.”56 For this reason, Sun Microsystems and Microsoft give their employees private
Open-offices encourage communication and interaction throughout an organization, but they have their drawbacks as well. In fact, sales of taller cube walls, like those shown here, are increasing, while sales of traditional four-foot walls are decreasing.
open office systems Offices in which the physical barriers that separate workers have been removed in order to increase communication and interaction.
shared spaces Spaces used by and open to all employees.
private spaces Spaces used by and open to just one employee.
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offices. William Agnello, Sun’s vice president of real estate and the workplace, says, “We have researched the heck out of this. Our studies show that, for our engineers, there are just too many distractions and interruptions.”57 Microsoft’s John Pinette agrees: “Private offices allow our employees to concentrate on their work and to avoid unnecessary distractions—[which is] obviously critical when you’re doing something that requires as much focus as developing software does.”58 Indeed, because there is so much shared space and so little private space, companies with open systems have to take steps to give employees privacy when they need to concentrate on individual work. One step is simply to use taller cubicles. Indeed, Herman Miller, a manufacturer of office furniture and systems, has seen sales of its 62-inch-high cubicle panels increase by 18 percent while sales of its 46-inch-high panels have dropped by 19 percent. Another approach is to install white noise machines to prevent voices and other noises from disrupting others.59 At Procter & Gamble’s headquarters in Cincinnati, white noise from two interior waDON’T SCAVENGE THAT OFFICE terfalls provides a constant background sound that mutes IF SOMEBODY IS STILL IN IT other noises. Yet another approach is to make conference It’s like roadkill in the animal kingdom. As rooms available. In contrast to traditional offices, where such soon as the word gets out that someone is rooms are used for meetings, many employees in open systems leaving the company, the remaining coworkreserve conference rooms when they need private time to ers start scheming to scavenge the office work. Another possibility is to turn a cubicle into a more prileftovers—chairs, computer monitors, filing vate space. When Mark Saunders, of GlaxoSmithKline Concabinets, and even staplers. Mary Wong, president of a human resources consulting sumer Healthcare, moved from a private office to a cubicle at company, says, “This issue is practically the end of a busy hallway, he said he “felt sensory overload.” everywhere. . . , professionals—anyone you To make it easier for him to concentrate, the company’s office and I would normally consider to be very design team created a nylon screen that can be placed around adult—turn into children” over the prospect his cubicle to block out visual distractions.60 If your office of picking an empty office clean of its “gooddoesn’t provide such screens, you can always fork out $39.95 ies.” Sometimes, however, and this is where for the Cube-a-Door®, a free-standing cardboard partition, it gets disrespectful, office scavengers move stamped with the words, “Work in Progress. Do Not Disin before the employee, who’s often been turb,” that will serve as a privacy screen or “door” to your laid off, has left. Ethics consultant Steve cubicle when you need to get work done and screen out interLawler tells the story of a laid-off manager ruptions. who, just hours after hearing the bad news, was already getting requests for the expensive Herman Miller Aeron chair in which he was still sitting. Office scavenging is a strange and predictable aspect of office life. It happens everywhere. But, if you’re going to scavenge, and you probably will, do the right thing by maintaining the dignity of departing coworkers: wait till the office is empty before you strike.61
Review 4: Intraorganizational Processes Today, companies are using reengineering, empowerment, and behavioral informality to change their intraorganizational processes. Through fundamental rethinking and radical redesign of business processes, reengineering changes an organization’s orientation from vertical to horizontal. Reengineering changes work processes by decreasing sequential and pooled interdependence and by increasing reciprocal interdependence. Reengineering promises dramatic increases in productivity and customer satisfaction, but it has been criticized as simply an excuse to cut costs and lay off workers. Empowering workers means taking decision-making authority and responsibility from managers and giving it to workers. Empowered workers develop feelings of competence and self-determination and believe that their work has meaning and impact. Workplaces characterized by behavioral informality are spontaneous and casual. The formality or informality of a workplace depends on four factors: language usage, conversational turn taking and topic selection, emotional and proxemic gestures, and physical and contextual cues. Casual dress policies and open office systems are two of the most popular methods for increasing behavioral informality.
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An interorganizational process is a collection of activities that occur among companies to transform inputs into outputs that customers value. In other words, many companies work together to create a product or service that keeps customers happy. For example, when you purchase a Liz Claiborne outfit, you’re not just buying from Liz Claiborne; you’re also buying from a network of 250 suppliers in 35 countries from Saipan, to Mexico, to Cambodia, to China that make those clothes for Liz Claiborne. After Liz Claiborne’s New York–based designers come up with a concept, it is shipped to a “sourcing” team in Hong Kong, which changes the design as needed to keep costs low and then finds companies that can produce the right fabrics and the entire line of clothing. Those companies then manufacture the first product prototypes and send them back to the New York designers for final inspection and possibly last-minute changes.62
interorganizational process A collection of activities that take place among companies to transform inputs into outputs that customers value.
In this section, you’ll explore interorganizational processes by learning about 5.1 modular organizations and 5.2 virtual organizations.63
5.1 Modular Organizations Stephen Roach, chief economist for investment bank Morgan Stanley, says that companies increasingly want to take “functions that aren’t central to their core competency,” and outsource them.64 Except for the core business activities that they can perform better, faster, and cheaper than others, modular organizations modular organization outsource all remaining business activities to outside companies, suppliers, spe- An organization that outsources cialists, or consultants. The term modular is used because the business activities noncore business activities to outside companies, suppliers, specialists, purchased from outside companies can be added and dropped as needed, much or consultants. like adding pieces to a three-dimensional puzzle. Exhibit 9.13 depicts a modular organization in which the company has chosen to keep training, human Exhibit 9.13 resources, sales, product design, manufacturing, customer service, research and Modular Organization development, and information technology as Outsourced Noncore core business activities, but it has outsourced Business Activities the noncore activities of product distribution, Web page design, advertising, payroll, acProduct Distribution counting, and packaging. Web Page Design Advertising Modular organizations have several advantages. First, because modular organizations pay for outsourced labor, expertise, or manufacturing capabilities only when needed, they can cost significantly less to run than tradiResearch & Payroll Training Development tional organizations. For example, when Apple came up with its iPod digital music player, it outsourced the audio chip design and manufacture to SigmaTel in Austin, Texas, and final assembly to Asutek ComputInformation Accounting Human Customer ers in Taiwan. Doing so not only reduced Technology Resources Service costs and sped up production (beating Sony’s Network Walkman to market), but also allowed Apple to do what it does best—design Manufacturing innovative products with easy-to-use soft65 ware. Furthermore, after other companies Sales Product Packaging imitated Apple by producing their own digiDesign tal music players, Apple was able to take advantage of its lower costs by aggressively cutting prices.66 To obtain these advantages, Core Business Activities
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however, modular organizations need reliable partners—vendors and suppliers that they can work closely with and can trust. Modular organizations have disadvantages, too. The primary disadvantage is the loss of control that occurs when key business activities are outsourced to other companies. Also, companies may reduce their competitive advantage in two ways if they mistakenly outsource a core business activity. First, as a result of competitive and technological change, the noncore business activities a company has outsourced may suddenly become the basis for competitive advantage. Second, related to that point, suppliers to whom work is outsourced can sometimes become competitors.
5.2 Virtual Organizations In contrast to modular organizations in which the interorganizational process revolves around a central company, a virtual organization is part of a network in An organization that is part which many companies share skills, costs, capabilities, markets, and customers of a network in which many companies with each other. Exhibit 9.14 shows a virtual organization in which, for share skills, costs, capabilities, “today,” the parts of a virtual company consist of product design, purchasing, markets, and customers to collectively solve customer problems or provide manufacturing, advertising, and information technology. Unlike modular specific products or services. organizations, in which the outside organizations are tightly linked to one central company, virtual organizations work with some companies in the network alliance, but not with all. So, whereas a puzzle with various pieces is a fitting metaphor for a modular organization, a potluck dinner is an appropriate metaphor for a virtual organization. All participants bring their finest food dish, but only eat what they want. Another difference is that the working relationships between modular organizations and outside companies tend to be more stable and longer lasting than the shorter, often temporary relationships found among the virtual companies in a network alliance. Thus, the composition of a virtual organization is always changing. The combination of network partners that a virtual corporation has at any one time depends on the expertise needed to solve a particular problem or provide a specific product or service. This is why the businessperson in the network organization shown in Exhibit 9.14 is saying, “Today, I’ll have . . . .” Tomorrow, the business could want something completely different. In this sense, the term virtual organization means the organization that exists “at the moment.” For example, 19 small companies in Pennsylvania have formed a network of virtual organizations that they call the “Agile Web.”67 Together, the companies have expertise in product development and design, machining, metal fabrication, diecasting, plastic-injection molding, finishing and coating, and the design and manufacture of electronic components. Tony Nickel, who coordinates business opportunities for the 19 Web members, says, “We do have multiple machine shops and multiple sheet-metal shops. If only one is needed, I make the decision based on the nature of the [customer’s] request and the areas of specialization of the member firms.” He adds, “We’ve already had one occasion where, while negotiating with a customer, we discovered that we really didn’t have the right Web 68 Exhibit 9.14 member for a particular part—so we changed members.” Virtual organizations have a number of advantages. They let companies Virtual Organization share costs. And, because members can quickly combine their efforts to meet customers’ needs, they are fast and flexible. For exProduct Today, Information I’ll have... Design Technology ample, Tony Nickel of the Agile Web says, “Where we think we really can have rapid response is when a customer wants help in Purchasing the design and building of an assembly or system. Then I can bring members of the Web to the table—or to the customer’s facility—right away; the next day, if required. We are able to assemble a team from the Web within 24 hours if that is what the customer Manufacturing Advertising wants.”69 Finally, because each member of the network alliance is the “best” at what it does, in theory, virtual organizations should provide better products and services in all respects. virtual organization
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As with modular organizations, a disadvantage of virtual organizations is that once work has been outsourced, it can be difficult to control the quality of work done by network partners. The greatest disadvantage, however, is that tremendous managerial skills are required to make a network of independent organizations work well together, especially since their relationships tend to be short and based on a single task or project. Virtual organizations are using two methods to solve this problem. The first is to use a broker, like Tony Nickel. In traditional, hierarchical organizations, managers plan, organize, and control. But, with the horizontal, interorganizational processes that characterize virtual organizations, the job of a broker is to create and assemble the knowledge, skills, and resources from different companies for outside parties, such as customers.70 The second way to make networks of virtual organizations more manageable is to use a virtual organization agreement that, somewhat like a contract, specifies the schedules, responsibilities, costs, payouts, and liabilities for participating organizations.71 The Agile Web has operationalized its virtual organization agreement on a day-to-day basis through Web-based software that is used by all 19 companies to schedule work, share design specifications, and provide anything else they need to complete their work for particular customers.72 For more information on how a virtual organization works, see http://www.agileweb.com.
Review 5: Interorganizational Processes Organizations are using modular and virtual organizations to change interorganizational processes. Because modular organizations outsource all noncore activities to other businesses, they are less expensive to run than traditional companies. However, modular organizations require extremely close relationships with suppliers, may result in a loss of control, and could create new competitors if the wrong business activities are outsourced. Virtual organizations participate in a network in which they share skills, costs, capabilities, markets, and customers. As customer problems, products, or services change, the combination of virtual organizations that work together changes. Virtual organizations can reduce costs, respond quickly, and, if they can successfully coordinate their efforts, produce outstanding products and service.
Key Terms authority, 280 autonomy, 287 behavioral formality, 293 behavioral informality, 293 centralization of authority, 283 chain of command, 281 complex matrix, 280 customer departmentalization, 276 decentralization, 283 delegation of authority, 282 departmentalization, 274 empowering workers, 292 empowerment, 293 feedback, 287 functional departmentalization, 274 geographic departmentalization, 277 internal motivation, 286
interorganizational process, 297 intraorganizational process, 290 job characteristics model (JCM), 286 job design, 284 job enlargement, 285 job enrichment, 285 job rotation, 285 job specialization, 284 line authority, 281 line function 281 matrix departmentalization, 278 mechanistic organization, 288 modular organization, 297 open office systems, 295 organic organization, 288 organizational process, 273 organizational structure, 272
pooled interdependence, 292 private spaces, 295 product departmentalization, 275 reciprocal interdependence, 292 reengineering, 291 sequential interdependence, 292 shared spaces, 295 simple matrix, 280 skill variety, 287 staff authority, 281 staff function, 281 standardization, 283 task identity, 287 task interdependence, 292 task significance, 287 unity of command, 281 virtual organization, 298
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Concept Check 1. Compare an organizational structure and an organizational process. 2. What five methods have traditionally been used to departmentalize work and workers? Give one advantage and one disadvantage of each type. 3. How do managers generally describe organizational authority? 4. When delegating work, what is the relationship between responsibility, authority, and accountability? 5. Why do companies use job specialization? How can specialized jobs be modified to eliminate the boredom and low job satisfaction associated with them?
6. What is main concern of the job characteristics model? 7. What differentiates a mechanistic organization from an organic organization? 8. How do companies use reengineering to redesign organizational processes? 9. How do formal workplaces differ from informal workplaces? 10. What are the differences between modular and virtual organizations? What are their advantages and disadvantages?
Self-Assessment FLEXIBILITY AND STRUCTURE Every organization needs some degree of flexibility and standardization. In other words, companies need to have enough flexibility in their organizations to respond to changes in their business environment, but firms also must have certain structures in place to ensure smooth operations. For example, if someone gets hurt on company property, clear procedures about what to do in the case of an accident help managers respond
quickly and confidently. But being overly committed to following rules can hamstring an organization and keep it from growing. As a manager, you will probably encounter both types of situations, and to respond appropriately you will need to have an idea of how comfortable you are in a formal environment versus a more loosely structured workplace. On page 619 of the SelfAssessment Appendix is a survey that can give you baseline information on your preferences for structure.
Management Decision GARBAGE JOBS Glancing at the newspaper machine in the lobby, you are happy to see the headline proclaiming the end of the garbage collectors’ strike in a nearby city.73 That kind of strike tends to have a ripple effect on neighboring areas, and as the manager of a private waste collection company in the region, you breathe a sigh of relief. Nonetheless, as you walk to your office, you can’t help thinking about the job of your garbage collectors. It’s repetitive, hot (or cold, depending on the season), anonymous, and relatively thankless. Your employees work in pairs, so each truck has one driver and one “thrower”—not much variety for either worker. There’s not much on-the-job interaction either, as the driver is in the cab and the thrower rides on the back of the
truck. And with the company looking into purchasing newer trucks that automatically lift and dump the garbage cans, you may even go to one person per truck. In addition, to minimize the time it takes to collect the trash, you assign each team to the same neighborhood week after week. That ensures maximum efficiency: drivers subconsciously time traffic lights, pace themselves for starts and stops, and know the route without needing to consult a map. Even when collectors know the route, the work can be grueling. Each route has to be finished each day; no one will tolerate garbage left on the curb after the assigned pickup day. So, even if a traffic accident or construction brings traffic to a standstill, the garbage has to be collected each day according to schedule.
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The more you think about it, on paper the job sounds dull—and somewhat stressful. As you fire up your computer and begin to look at your favorite industry blog, you wonder if you can make the job more interesting for your employees. Scanning the screen, you link to an article about a region in Britain that is putting defibrillators in garbage trucks to complement the ambulance service in rural areas. Well, that’s not quite what you had in mind for making garbage collecting interesting for your employees, but still, it’s something.
Questions 1. Can you use the job characteristics model (JCM) to redesign the job of the trash collector to be internally motivating? How? 2. Assume that the trash collection job is not internally motivating. Identify areas where you can strengthen the job’s core characteristics and give specific examples. 3. Is it possible to redesign the very specialized job of a garbage collector to make it more satisfying? Is a redesign feasible? In other words, do you redesign the job or keep it as is? Explain your reasoning.
Management Team Decision PLUSH MANAGEMENT PERKS: PARTAKING OR PRUNING? “They do, too!” “They do not!” “You don’t know what you’re talking about.” “See, it’s attitudes like yours that prove my point!” Ah, nothing like hearing your two top executives argue during lunch to raise your blood pressure.74 You knew that Sam, the VP of Sales, was going to get mad when Catherine, the VP of Human Resources, suggested getting rid of executive perks (the private dining room, company cars, first-class air travel, etc.). It took Sam 25 years to become a vice president, and understandably, he doesn’t want to see his perks and rewards reduced. You didn’t think it was possible for someone to get that mad that fast, though. Given the way Sam’s face instantly turned beet red when Catherine suggested that the reserved parking spaces be eliminated, it’s a good thing she caught him between bites or he might have choked on his shrimp salad. Well, with executive perks topping the agenda for the annual executive retreat next weekend, Sam and Catherine’s argument has given you something to think about. Is Catherine right? Should all executive perks be eliminated? Or is Sam right? Should the executive perks be left alone? After all, even Catherine got defensive when Sam asked her how happy she’d be if the company closed its on-site day care. When she responded, “They wouldn’t dare do that,” Sam barked, “That’s exactly the way I feel about your recommendations!” Well, you need to get your thoughts sorted out. A good place to start is with the list of executive perks currently being offered by the company:
• • • • • •
company cars reserved parking spaces company cellular phones personal financial counseling personal liability insurance executive dining room
• • • • • • • •
first-class air travel free travel for a spouse on extended business trips signing bonuses stock options country club memberships large, expensively furnished private offices home security systems home computer/office equipment
For this exercise, assemble a five-person management team and use the stepladder group decisionmaking technique described in Chapter 5. At each point in the stepladder, discuss all three questions and come to a consensus on each before adding the next group member. Questions 1. Of the perks listed above, choose three that your managers are most likely to desire. In other words, which three executive perks would your managers scream the most about if you took them away? Explain your reasoning for each of your three choices. 2. Of the perks listed above, which three probably create the most resentment among your nonmanagerial work force? In other words, which three executive perks anger your workers the most? Explain your reasoning for each of your three choices. 3. Which of the following options is likely to benefit the company most in the long run? a. Eliminate all executive perks. b. Retain all executive perks. c. Selectively eliminate perks. Explain the reasoning behind your choice. If you choose option (c), specify the perks you kept and explain why you kept them.
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Develop Your Career Potential “WORK” IN SOMEONE ELSE'S SHOES Why is learning to see things from someone else’s perspective one of the most difficult things to do in today’s workplace? Sometimes, the inability to see things as others see them has to do with the people involved. Inexperience, ignorance, and selfishness can all play a role. In most organizations, however, the inability to see things from someone else’s perspective results from the jobs themselves, not the people who do them. Because jobs limit who we talk to, what we talk about, what we think about, and what we care about at work, it should not be a surprise that people who perform different jobs have very different views about each other and the workplace. For example, at Southwest Airlines the pilots who fly the planes and the ground crews who unload, load, and refuel them had little appreciation for each other. The ground crews felt that the pilots treated them like second-class citizens. The pilots couldn’t understand why the ground crews weren’t doing more to get their planes out of the gates and in the air as fast as possible. To improve understanding and help them see things from each other’s perspective, Southwest created a program called the “Cutting Edge,” in which the captains and ground crews learned a lot about each other’s jobs. For example, the pilots brought the ground crews into their cockpits and showed them the detailed processes they were required to follow to get planes ready for departure. The pilots, on the other hand, gained appreciation and understanding by actually working as members of Southwest’s ground crews. After several days of demanding ground crew work, Southwest pilot Captain Mark Boyter said: I remember one time when I was working the ramp [as a member of a ground crew] in Los Angeles. I was dead tired. I had flown that morning and had a couple of legs in, so I got out of my uniform and jumped into my ramp clothes. That afternoon was very hot. It was in the 80s—I can’t imagine how they do it on a 120degree day in Phoenix. I was tired and hungry and hadn’t had a break. Then I saw this pilot sitting up there in the cockpit eating his frozen yogurt. I said to myself, “Man,
I’d like to be up there now.” Then I caught myself. I’m up there every day. Now, I know that pilot has been up since 3:00 in the morning. I know that he’s been flying an airplane since 6:00 A.M. I know it’s 3:00 in the afternoon and he hasn’t had a chance to get off and have a meal yet today. I know all that, and yet, the yogurt still looks really good to me. Then I thought, “How can a ramp agent [on the ground crew] in Los Angeles who works his butt off for two or three years, working double shifts two or three times a week, understand this? It hit me that there’s a big gap in understanding here.”75 The misunderstandings between Southwest’s pilots and ground crews are not unique. All organizations experience them. Nurses and doctors, teachers and students, and managers and employees all have difficulty seeing things from each other’s perspective. As Southwest’s Cutting Edge program shows, however, you can minimize differences and build understanding by “working” in someone else’s shoes. Questions 1. Describe the job-related differences or tensions where you work. Who is involved? What jobs do they do? Explain why the job-related differences or tensions exist. 2. Since the best way to see things from someone else’s perspective is to “work” in his or her shoes, see if you can spend a day, a morning, or even two hours performing one of these jobs. If that’s not possible, spend some time carefully observing the jobs and then interview several people who perform them. Describe your boss’s reaction to this request. Was he or she supportive? Why or why not? 3. Answer the following questions after you have worked the job or conducted your interviews. What most surprised you about this job? What was easiest? What was hardest? Explain. Now that you’ve had the chance to see things as others see them, what do you think would happen, good or bad, from letting other people in your organization work in someone else’s shoes? Explain.
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Reality Bites is an American film starring Winona Ryder, Ethan Hawke, Ben Stiller, Steve Zahn, Janeane Garofalo, and David Spade. The plot follows the life of recent college graduate Lelaine Pierce (Ryder), who wants to make a documentary about her friends as a way to capture the strife and problems confronting her generation. In this scene, she is applying for a job at Wiener Schnitzel, a fast-food restaurant managed by David Spade. What to Watch for and Ask Yourself
1. Using the terms from the chapter, outline the job of cashier as Spade is describing it in the clip. 2. Is the cashier position a line or staff function? 3. Describe the atmosphere at the restaurant.
Management Workplace Black Diamond
Organizational structure should imitate the culture and purpose of the organization—at least, according to Peter Metcalf, founder of Black Diamond, a manufacturer of mountain climbing equipment. A company that started with 50 employees has grown to over 200 people who generate over $20 million in annual revenue. Black Diamond is now the leading maker of high-end climbing equipment, and paradoxically, it got there by creating a flat organization. What to Watch for and Ask Yourself
1. What evidence do you see in the video that Black Diamond is an informal work environment? 2. Describe organizational authority at Black Diamond. 3. Why do you think a loose organizational structure is successful at Black Diamond?
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Chapter10 What Would You Do? Why Work Teams? 1. The Good and Bad of Using Teams 1.1 The Advantages of Teams 1.2 The Disadvantages of Teams 1.3 When to Use Teams
2. Kinds of Teams 2.1 Autonomy, the Key Dimension 2.2 Special Kinds of Teams
C H A P T E R
Managing Work Teams 3. Work Team Characteristics 3.1 3.2 3.3 3.4 3.5
Team Norms Team Cohesiveness Team Size Team Conflict Stages of Team Development
4. Enhancing Work Team Effectiveness 4.1 Setting Team Goals and Priorities 4.2 Selecting People for Teamwork 4.3 Team Training 4.4 Team Compensation and Recognition
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise
Xtra! Nine exhibit worksheets, author FAQs, quiz, Management News, and the video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
Standard Motor Products, Edwardsville, Kansas.1 Standard Motor Products makes aftermarket auto parts (for repairs and replacement) that are sold by warehouse distributors like Carquest and NAPA (National Automotive Parts Association) and auto parts retailers like Advance Auto Parts and AutoZone. Its products include emission and engine controls, voltage regulators, sensors, ignition wires, distributor caps and rotors, ignition and electrical parts, air-conditioning compressors, accumulators, fan clutches, heater cores and valves, evaporators, hoses, and window lift motors. Although the aftermarket auto parts market will reach $56 billion by 2008, it’s incredibly competitive, and companies that don’t continue to improve quickly lose market share and profits. And, right now, Standard Motor Products is struggling. Downtime—when machines aren’t running—is up significantly, and when parts aren’t being produced, revenues aren’t being generated. Not surprisingly, productivity is also down, and costs are up. Since Standard competes in an industry where the difference between a profit and a loss is three cents per hose, it can’t continue to incur rising costs. The company is already losing millions per year and is closing down money-losing production facilities. You’re worried that your plant, which is facing a “perfect storm” of problems, is next. Problem number one is a top-down, authoritarian culture where managers pride themselves on being tough on workers. Combine that with a work force that is 50 percent unionized, and let’s just say there’s no love lost between managers and workers. Second, the workers dislike each other, too. Language difficulties separate the white and African American workers from the Hispanic and Asian workers. In fact, negative feelings were so strong that when the company introduced English language classes, almost no one attended. With their noise and nonstop pressure to keep costs low, quality high, and production on schedule, manufacturing plants are already challenging places to work. Stir in an authoritarian culture, intense hostility between labor and management, a militant employee union, basic communication/language problems between employees, and hard feelings all around,
What Would You Do?
and you’ve got the recipe for poor results that are sure to lead company headquarters to shut this place down. After thinking about this situation for a while, you turn to your most trusted supervisor and say, “Things are so bad. Why don’t we just start over from zero? I’m thinking about using teams to run everything in the plant. What do you think?” As he pauses, you can sense the mixed reaction coming. He says, “I don’t know. At the plant where I used to work, we switched to teams, and the employee turnover rate, which was near zero, jumped to double digits. Plus, didn’t Levi’s, the jeans manufacturer, try teams in its manufacturing plants with terrible results?” You respond, “I understand your reluctance. Teams can be tricky. But they hold a lot of promise, too. If we do teams right, productivity, quality, and employee satisfaction should rise, while costs decrease. Besides, what have we got to lose? If things don’t change, headquarters is going to shut us down anyway. We have to try something.” But, if we’re going to give teams or any other idea a chance, we have to do our homework by answering STUDY TIP these questions. First, does it Make up a crossword puzzle make sense for us to use using the key terms in this teams, and, if so, what kind of teams should we use? Second, chapter. Writing the clues how should people who work will help you remember the on teams be trained and paid? definition and the context We’ve got to find a way to enof each concept. Make courage individual initiative, photocopies for exam time while at the same time encouraging people to work together and for your study group. on teams. Third, who leads the teams, managers or employees? And what roles should those leaders play? No matter what you decide, if the plant doesn’t improve, your job and everyone else’s will be on the line. If you were the plant manager at Standard Motor Products’ Edwardsville, Kansas plant, what would you do?
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A growing number of organizations are significantly improving their effectiveness by establishing work teams. In fact, 91 percent of U.S. companies use teams and groups of one kind or another to solve specific problems.2 Nonetheless, with the exception of early adopters such as Procter & Gamble and Cummins Engine, which began using teams in 1962 and 1973, respectively, many companies did not establish work teams until the mid to late 1980s. Boeing, Caterpillar, Champion International, Ford, and General Electric, for example, set up their first teams in the 1980s.3 So, most companies have been using teams for only 20 to 25 years, if that long. In other words, teams are a relatively new phenomenon in companies, and there’s still much for organizations to learn about managing them. We begin this chapter by reviewing the advantages and disadvantages of teams and exploring when companies should use them instead of more traditional approaches. Next, we discuss the different types of work teams and the characteristics common to all teams. The chapter ends by focusing on the practical steps to managing teams—team goals and priorities, and organizing, training, and compensating teams.
Why Work Teams? work team A small number of people with complementary skills who hold themselves mutually accountable for pursuing a common purpose, achieving performance goals, and improving interdependent work processes.
Work teams consist of a small number of people with complementary skills who hold themselves mutually accountable for pursuing a common purpose, achieving performance goals, and improving interdependent work processes.4 By this definition, computer programmers working on separate projects in the same department of a company would not be considered a team. To be a team, the programmers would have to be interdependent and share responsibility and accountability for the quality and amount of computer code they produced.5 In many industries, teams are growing in importance because they help organizations respond to specific problems and challenges. Though work teams are not the answer for every situation or organization, if the right teams are used properly and in the right settings, teams can dramatically improve company performance over more traditional management approaches and instill a sense of vitality in the workplace that is otherwise difficult to achieve.
1 2
1
After reading the next two sections, you should be able to explain the good and bad of using teams. recognize and understand the different kinds of teams.
THE GOOD AND BAD OF USING TEAMS
Let’s begin our discussion of teams by learning about 1.1 the advantages of teams, 1.2 the disadvantages of teams, and 1.3 when to use and not use teams.
1.1 The Advantages of Teams Companies are making greater use of teams because teams have been shown to improve customer satisfaction, product and service quality, speed and efficiency in product development, employee job satisfaction, and decision making.6 Teams help businesses increase customer satisfaction in several ways. One way is to create work teams that are trained to meet the needs of specific customer groups. When Eastman Kodak reengineered its customer service center, it created specific teams to field calls from the general public (based on the geographic location of the caller), scientific users, and corporate users. Under this system, customers are immediately directed to the team trained to meet their needs. Within a year, the work teams doubled the rate at which Kodak solved customer problems on the first phone call.7
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Businesses also create problem-solving teams and employee involvement teams to study ways to improve overall customer satisfaction and make recommendations for improvements. Teams like these typically meet on a weekly or monthly basis. Every day at the Longaberger Company, 2,500 skilled weavers make over 40,000 high-quality baskets (which sell for $30 to $260). When productivity began to drop, management turned to an employee involvement group to solve the problem. After studying 40 basket makers for three weeks, the team found that the weavers often had the wrong materials. The team came up with a solution that makes sure each weaver has the proper kinds of wood veneers used to make the different baskets. Before the new system, workers ran out of the proper materials 53 times per day. Now, that happens only 9 times per day. And, because the new system has also cut scrap (leftover, unusable materials) by 75 percent, the company is saving $3 million per year.8 Teams also help firms improve product and service quality in several ways.9 In contrast to traditional organizational structures where management is responsible for organizational outcomes and performance, teams take direct responsibility for the quality of the products and service they produce. At Whole Foods, a supermarket chain that sells groceries and health foods, the 10 teams that manage each store are responsible for store quality and performance; they are also directly accountable because the size of their team bonus depends on the store’s performance. Productive teams get an extra $1.50 to $2.00 per hour in every other paycheck. As a result, Whole Food teams don’t want friends on their teams—they want talented productive workers.10 And making teams directly responsible for service and product quality pays off. At Whole Foods, comparable store sales, meaning a particular store’s sales this year compared to that store’s sales last year, are increasing between 7.7 and 10 percent per year on average! Likewise, a survey by Industry Week found that 42 percent of the companies that use teams report revenues of more than $250,000 per employee, compared to only 25 percent of the companies that don’t use teams.11 As you learned in Chapter 7, companies that are slow to innovate or integrate new features and technologies into their products are at a competitive disadvantage. Therefore, a third reason that teams are increasingly popular is that they can increase speed and efficiency when designing and manufacturing products.12 Traditional product design proceeds sequentially, meaning that one department, such as engineering or manufacturing, has to finish its work on the design before the next department, such as marketing, can start. Unfortunately, not only is sequential development slow, but it also encourages departments to work in isolation from one another.13 A faster and better way to design products is to use overlapping development phases, which often requires the use of teams. With overlapping development phases, teams of employees, consisting of members from the different functional areas in a firm (i.e., engineering, manufacturing, and marketing), work on the product design at the same time. Because all of the different functional areas are involved in the design process from the start, the company can avoid most of the delays and frustration associated with sequential development. Industrial Light & Magic (ILM), founded by George Lucas, the originator and producer of Star Wars, has won 19 Academy Awards for visual effects and technical achievement. ILM uses overlapping development phases to quickly produce specialized, computer effects for movies. Teams of artists and animators work simultaneously on different scenes, such as the opening and closing of a movie, to speed up production. Visual-effects
A team-based structure is part of the reason for the resounding success of Whole Foods Market. Employee teams are responsible for all aspects of the store's operations. This Whole Foods team is in charge of preparing the seafood section for the opening of the New York City store.
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cross training Training team members to do all or most of the jobs performed by the other team members.
producer Jacqui Lopez says, “When we get down to the wire, our artists need every second they can get in front of their computers.”14 Oftentimes, she says, “Being late is not an option. The publicity is already locked in, and the studios have schedules to keep. We can’t be late.”15 And ILM has never been late. Indeed, whether the movie is Harry Potter or Pirates of the Caribbean, when film studios and directors fall behind, they regularly come to ILM to avoid missing deadlines. Another reason for using teams is that teamwork often leads to increased job satisfaction.16 One reason that teamwork can be more satisfying than traditional work is that it gives workers a chance to improve their skills. This is often accomplished through cross training, in which team members are taught how to do all or most of the jobs performed by the other team members. Mary Keene used to stand in one spot for eight hours a day using a power chisel to chip cast iron from Ford automobile engines. She said, “You thought your arms would fall off. It was the worst job I had there.” Today, thanks to cross training, Mary and her Plant 2 coworkers at Ford’s Brook Park, Ohio manufacturing facility perform seven different jobs each shift, such as installing ignition coils, taking apart engines, restarting machinery after it breaks down, and contacting suppliers if engine parts are of subpar quality.17 The advantage for the organization is that cross training allows a team to function normally when one member is absent, quits, or is transferred. The advantage for workers is that cross training broadens their skills and increases their capabilities while also making their work more varied and interesting. Indeed, Ford’s Mary Keene says, “Plant 2 is the best we’ve ever had it.” Huck Granakis, the United Auto Workers’ building chairman and a member of Plant 2’s operating committee, says, “They love it. I know of no one who has quit to go to another job.”18 A second reason that teamwork is satisfying is that work teams often receive proprietary business information that is available only to managers at most companies. For example, at Whole Foods, the supermarket chain that sells groceries and health foods, team members are given full access to their store’s financial information and everyone’s salaries, including those of the store manager and the CEO.19 Each day, next to the time clock, Whole Foods employees can see the previous day’s sales for each team, as well as the sales on the same day from the previous year. Each week, team members can examine the same information, broken down by team, for all of the Whole Foods stores in their region. And each month, store managers review information on profitability, including sales, product costs, wages, and operating profits, with each team in the store. Since team members decide how much to spend, what to order, what things should cost, and how many team members should work each day, this information is critical to making teams work at Whole Foods.20 Team members also gain job satisfaction from unique leadership responsibilities that typically are not available in traditional organizations. For example, in contrast to most orchestras, which are led by one conductor who is clearly in charge, at the award-winning, New York City–based Orpheus chamber orchestra, the concertmaster’s role, as they call it, is rotated among different members of the orchestra. Flutist Susan Palma-Nidel says that assuming the concertmaster’s role “has allowed me to discover strengths that I didn’t know I had. Not only have I helped lead the group, but I’ve also been interviewed by the media— something I never thought I’d do. If I hadn’t been forced to do those things, I’m not sure that I ever would have.”21 Furthermore, rotating leadership among team members can lead to more participation and cooperation in team decision making and improved team performance.22 Finally, teams share many of the advantages of group decision making discussed in Chapter 5. For instance, because team members possess different knowledge, skills, abilities, and experiences, a team is able to view problems from multiple perspectives. This diversity of viewpoints increases the odds that team decisions will solve the underlying causes of problems and not just address
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ADVANTAGES
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DISADVANTAGES
Customer satisfaction
Initially high employee turnover
Product and service quality
Social loafing
Speed and efficiency in product development
Disadvantages of group decision making (groupthink, inefficient meetings, domination by a minority, lack of accountability)
Employee job satisfaction Better decision making and problem solving (multiple perspectives, more alternative solutions, increased commitment to decisions)
1.2 The Disadvantages of Teams
HE R IGHT T G T H I IN NG DO
Exhibit 10.1 the symptoms. The increased knowledge and information available to teams Advantages and Disadvantages of also make it easier for them to generate more alternative solutions, which is a Teams critical part of improving the quality of decisions. Because team members are involved in decision-making processes, they are also likely to be more committed to making those decisions work. In short, teams can do a much better job than individuals in two important steps of the decision-making process: defining the problem and generating alternative solutions. Exhibit 10.1 summarizes the advantages and disadvanDON’T BE A TEAM SLACKER—DO YOUR tages of teams (the latter are discussed in the next section). SHARE Given the amount of teamwork required in business classes, most of you have encountered slackers in student groups. Perhaps you’ve even “slacked” yourself from time to time. From an ethical perspective, though, slacking is clearly wrong. In reality, it’s no different from cheating on an exam. When you slack, you’re relying on others to do your work. You benefit without putting forth effort. And “your” team’s project, paper, or presentation hasn’t benefited from your contributions. In fact, it’s very likely that your slacking may have significantly hurt “your” team’s performance. Furthermore, in the real world, the consequences of team slacking, such as lost sales, poorer decisions, lower-quality service or products, or lower productivity, are much larger. So, do the right thing. Whether it’s in class or in business, don’t be a slacker. Don’t cheat your teammates. Pull your share of the “rope.”
Although teams can significantly improve customer satisfaction, product and service quality, speed and efficiency in product development, employee job satisfaction, and decision making, using teams does not guarantee these positive outcomes. In fact, if you’ve ever participated in team projects in your classes, you’re probably already aware of some of the problems inherent in work teams. Despite all of their promise, teams and teamwork are also prone to these significant disadvantages: initially high turnover, social loafing, and the problems associated with group decision making. The first disadvantage of work teams is initially high turnover. Teams aren’t for everyone, and some workers balk at the responsibility, effort, and learning required in team settings. When General Electric’s Salisbury plant switched to teams, the turnover rate jumped from near zero to 14 percent. Plant manager Roger Gasaway said of teams and teamwork, “It’s not all wonderful stuff.”23 Other people may quit because they object to the way team members closely scrutinize each other’s job performance, particularly when teams are small. Randy Savage, who works for Eaton Corporation, a manufacturer of car and truck parts, said, “They say there are no bosses here, but if you screw up, you find one pretty fast.” Beverly Reynolds, who quit Eaton’s team-based system after nine months, said her coworkers “weren’t standing watching me, but from afar, they were watching me.” And even though her teammates were willing to help her improve her job performance, she concluded, “As it turns out, it just wasn’t for me at all.”24 Social loafing is another disadvantage of work teams. Social loafing occurs when workers withhold their efforts and fail to perform their share of the work.25 A nineteenth-century German scientist named Ringleman first
social loafing Behavior in which team members withhold their efforts and fail to perform their share of the work.
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1. The presence of someone with expertise. Team members will withhold effort when another team member is highly qualified to make a decision or comment on an issue. 2. The presentation of a compelling argument. Team members will withhold effort if the arguments for a course of action are very persuasive or similar to their own thinking. 3. Lacking confidence in one’s ability to contribute. Team members will withhold effort if they are unsure about their ability to contribute to discussions, activities, or decisions. This is especially so for high-profile decisions. 4. An unimportant or meaningless decision. Team members will withhold effort by mentally withdrawing or adopting a “who cares” attitude if decisions don’t affect them or their units, or if they don’t see a connection between their efforts and their team’s successes or failures. 5. A dysfunctional decision-making climate. Team members will withhold effort if other team members are frustrated or indifferent or if a team is floundering or disorganized. Source: P. W. Mulvey, J. F. Veiga, & P. M. Elsass, “When Teammates Raise a White Flag,” Academy of Management Executive 10, no. 1 (1996): 40–49.
Exhibit 10.2 Factors That Encourage People to Withhold Effort in Teams
documented social loafing when he found that one person pulling on a rope alone exerted an average of 63 kilograms of force on the rope. In groups of three, the average force dropped to 53 kilograms. In groups of eight, the average dropped to just 31 kilograms. Ringleman concluded that the larger the team, the smaller the individual effort. In fact, social loafing is more likely to occur in larger groups where identifying and monitoring the efforts of individual team members can be difficult.26 In other words, social loafers count on being able to blend into the background, where their lack of effort isn’t easily spotted. From team-based class projects, most students already know about social loafers or “slackers,” who contribute poor, little, or no work whatsoever. Not surprisingly, a study of 250 student teams found that the most talented students are typically the least satisfied with teamwork because of having to carry “slackers” and do a disproportionate share of their team’s work.27 How prevalent is social loafing on teams? One study found that when team activities were not mandatory, only 25 percent of manufacturing workers volunteered to join problem-solving teams, 70 percent were quiet, passive supporters (i.e., not putting forth effort), and 5 percent were actively opposed to these activities.28 Another study found that on management teams, 56 percent of the managers, or more than half, withheld their effort in one way or another. Exhibit 10.2 lists the factors that encourage people to withhold effort in teams. Finally, teams share many of the disadvantages of group decision making discussed in Chapter 5, such as groupthink. In groupthink, members of highly cohesive groups feel intense pressure not to disagree with each other so that the group can approve a proposed solution. Because groupthink restricts discussion and leads to consideration of a limited number of alternative solutions, it usually results in poor decisions. Also, team decision making takes considerable time, and team meetings can often be unproductive and inefficient. Another possible pitfall is minority domination, where just one or two people dominate team discussions, thus restricting consideration of different problem definitions and alternative solutions. Finally, team members may not feel accountable for the decisions and actions taken by the “team.”
1.3 When to Use Teams As the two previous subsections made clear, teams have significant advantages and disadvantages. Therefore, the question is not whether to use teams, but when and where to use teams for maximum benefit and minimum cost. As Doug Johnson, associate director at the Center for the Study of Work Teams, put it, “Teams are a means to an end, not an end in themselves. You have to ask
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USE TEAMS WHEN . . .
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DON’T USE TEAMS WHEN . . .
there is a clear, engaging reason or purpose.
there isn’t a clear, engaging reason or purpose.
the job can’t be done unless people work together.
the job can be done by people working independently.
rewards can be provided for teamwork and team performance.
rewards are provided for individual effort and performance.
ample resources are available.
the necessary resources are not available.
teams will have clear authority to manage and change how work gets done.
management will continue to monitor and influence how work gets done.
Source: R. Wageman, “Critical Success Factors for Creating Superb Self-Managing Teams,” Organizational Dynamics 26, no. 1 (1997): 49–61.
yourself questions first. Does the work require interdependence? Will the team philosophy fit company strategy? Will management make a long-term commitment to this process?”29 Exhibit 10.3 provides some additional guidelines on when to use or not use teams.30 First, teams should be used when there is a clear, engaging reason or purpose for using them. Too many companies use teams because they’re popular or because the companies assume that teams can fix all problems. Teams are much more likely to succeed if they know why they exist and what they are supposed to accomplish, and more likely to fail if they don’t. For example, at CBS television, chief information officer Amy Berkowitz has split a sizable information technology staff into four different groups that support four kinds of company software—finance and administration, sales and traffic, programming and production, and interactive systems. Project managers oversee three to five dedicated work teams in each area. Berkowitz says, “The key is to make sure [the work teams] have a very focused purpose. And that they’re very outcomebased.”31 Consequently, each support team is now measured on adaptability, speed, and innovation. Jon Katzenback, coauthor of The Wisdom of Teams, supports Berkowitz’s approach, saying, “If groups want to achieve team performance, the most important factor is not the leader of the team; it is the clarity around the performance purpose for that group. The more clear and compelling that is, the more naturally those people will function as a team.”32 Second, teams should be used when the job can’t be done unless people work together. This typically means that teams are needed when tasks are complex, require multiple perspectives, or require repeated interaction with others to complete. For example, contrary to stories of legendary programmers who write software programs by themselves, Microsoft uses teams to write computer code because of the enormous complexity of today’s software. Most software simply has too many options and features for one person (or even one team) to complete it all. Likewise, Microsoft uses teams because writing good software requires repeated interaction with others. Microsoft ensures this interaction by having its teams “check in” their computer code every few days. The different pieces of code written by the different teams are then compiled to create an updated working build or prototype of the software. The next day, all the teams and team members begin testing and debugging the new build. Over and over again, the computer code is compiled, sent back to the teams to be tested and improved, and then compiled and tested again.33 If tasks are simple and don’t require multiple perspectives or repeated interaction with others, however, teams should not be used. For instance, production levels dropped by 23 percent when Levi Strauss introduced teams in its factories. Levi’s mistake was assuming that teams were appropriate for garment
Exhibit 10.3 When to Use or Not Use Teams
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work, where workers perform single, specialized tasks, like sewing zippers or belt loops. Because this kind of work does not require interaction with others, Levi’s unwittingly pitted the faster workers against the slower workers on each team. Arguments, infighting, insults, and threats were common between faster workers and the slower workers who held back team performance. One seamstress even had to physically restrain an angry coworker who was about to throw a chair at a faster worker who constantly nagged her about her slow pace.34 Third, teams should be used when rewards can be provided for teamwork and team performance. Team rewards that depend on team performance, rather than individual performance, are the key to rewarding team behaviors and efforts. You’ll read more about team rewards later in the chapter, but for now it’s enough to know that if the level of rewards (individual versus team) is not matched to the level of performance (individual versus team), groups won’t work. As discussed above, this was the case with Levi’s, where a team structure was superimposed on individual jobs that didn’t require interaction between workers. After the switch to teams, faster workers placed tremendous pressure on slower workers to increase their production speed. And since pay was determined by team performance, top individual performers saw their pay drop by several dollars an hour, while slower workers saw their pay increase by several dollars an hour—all while overall productivity dropped in the plant.35
Review 1: The Good and Bad of Using Teams In many industries, teams are growing in importance because they help organizations respond to specific problems and challenges. Teams have been shown to increase customer satisfaction (specific customer teams), product and service quality (direct responsibility), speed and efficiency in product development (overlapping development phases), and employee job satisfaction (cross training, unique opportunities, and leadership responsibilities). Although teams can produce significant improvements in these areas, using teams does not guarantee these positive outcomes. Teams and teamwork have the disadvantages of initially high turnover and social loafing (especially in large groups). Teams also share many of the advantages (multiple perspectives, generation of more alternatives, and more commitment) and disadvantages (groupthink, time, poorly run meetings, domination by a few team members, and weak accountability) of group decision making. Finally, teams should be used for a clear purpose, when the work requires that people work together, when rewards can be provided for both teamwork and team performance, when ample resources can be provided, and when teams can be given clear authority over their work. 2
KINDS OF TEAMS
Companies use different kinds of teams for different purposes. Google uses teams to innovate and develop new products and to tweak and improve its search algorithms and functions.36 At Maytag’s Cleveland, Tennessee manufacturing plant, which makes gas and electric stoves, the use of teams has helped cut production costs by $7 million and reduce inventory by $10 million.37 Let’s continue our discussion of teams by learning about the different kinds of teams that companies like Google and Maytag use to make themselves more competitive. We look first at 2.1 how teams differ in terms of autonomy, which is the key dimension that makes one team different from another, and then at 2.2 some special kinds of teams.
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Low Team Autonomy
RESPONSIBILITIES
TRADITIONAL WORK GROUPS
High Team Autonomy
EMPLOYEE INVOLVEMENT GROUPS
SEMIAUTONOMOUS WORK GROUPS
SELFMANAGING TEAMS
SELFDESIGNING TEAMS
Control Design of Team Tasks Membership Production/Service Tasks Make Decisions Solve Problems Major Production/Service Tasks Make Decisions Solve Problems Information Give Advice/Make Suggestions Execute Task Sources: R. D. Banker, J. M. Field, R. G. Schroeder, & K. K. Sinha, “Impact of Work Teams on Manufacturing Performance: A Longitudinal Field Study,” Academy of Management Journal 39 (1996): 867-890; J. R. Hackman, “The Psychology of Self-Management in Organizations,” in Psychology and Work: Productivity, Change, and Employment, ed. M. S. Pallak & R. Perlof (Washington, DC: American Psychological Association), 85–136.
2.1 Autonomy, the Key Dimension Teams can be classified in a number of ways, such as permanent or temporary, or functional or cross-functional. However, studies indicate that the amount of autonomy possessed by a team is the key dimension that makes teams different from each another.38 Autonomy is the degree to which workers have the discretion, freedom, and independence to decide how and when to accomplish their jobs. Exhibit 10.4 displays an autonomy continuum that shows how five kinds of teams differ in terms of autonomy. Moving left to right across the top of the exhibit, traditional work groups and employee involvement groups have the least autonomy, semi-autonomous work groups have more autonomy, and, finally, self-managing teams and self-designing teams have the most autonomy. Moving from bottom to top along the left side of the exhibit, note that the number of responsibilities given to each kind of team increases directly with its autonomy. Let’s review each of these teams and their autonomy and responsibilities in more detail. The smallest amount of autonomy is found in traditional work groups, where two or more people work together to achieve a shared goal. In these groups,
Exhibit 10.4 Team Autonomy Continuum
traditional work group A group composed of two or more people who work together to achieve a shared goal.
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employee involvement team A team that provides advice or makes suggestions to management concerning specific issues.
semi-autonomous work group A group that has the authority to make decisions and solve problems related to the major tasks of producing a product or service.
self-managing team A team that manages and controls all of the major tasks of producing a product or service.
workers are responsible for doing the work or “executing the task,” but they do not have direct responsibility or control over their work. Workers report to managers, who are responsible for their performance and have the authority to hire and fire them, make job assignments, and control resources. For instance, suppose that an experienced worker blatantly refuses to do his share of the work, saying, “I’ve done my time. Let the younger employees do the work.” In a team with high autonomy, the responsibility of getting this employee to put forth his fair share of effort would belong to his teammates. But in a traditional work group, that responsibility belongs to the boss or supervisor. In fact, the supervisor in this situation calmly confronted the employee and told him, “We need your talent, [and] your knowledge of these machines. But if you won’t work, you’ll have to go elsewhere.” Within days, the employee’s behavior improved.39 Employee involvement teams, which have somewhat more autonomy, meet on company time on a weekly or monthly basis to provide advice or make suggestions to management concerning specific issues, such as plant safety, customer relations, or product quality.40 Though they offer advice and suggestions, they do not have the authority to make decisions. Membership on these teams is often voluntary, but members may be selected because of their expertise. The idea behind employee involvement teams is that the people closest to the problem or situation are best able to recommend solutions. When a large hospital found that it could no longer afford its expensive employee retirement plan, it turned to six employee involvement groups representing 3,000 workers for a solution. The groups analyzed the problem and then worked with retirement consultants (chosen by the groups) to generate new retirement options that were affordable, protected the retirement benefits that employees had already earned, and, in the end, were even better for employees.41 Semi-autonomous work groups not only provide advice and suggestions to management, but also have the authority to make decisions and solve problems related to the major tasks required to produce a product or service. Semiautonomous groups regularly receive information about budgets, work quality and performance, and competitors’ products. Furthermore, members of semiautonomous work groups are typically cross-trained in a number of different skills and tasks. In short, semi-autonomous work groups give employees the authority to make decisions that are typically made by supervisors and managers. That authority is not complete, however. Managers still play a role, though much reduced compared to traditional work groups, in supporting the work of semi-autonomous work groups. When semi-autonomous work groups were implemented at the Ritz-Carlton, Kansas City, longtime manager Sandi Shartzer, director of housekeeping, said, “I had attendants who for 22 years had been told where to go, what to do. Now they’re being told to do it on their own. Sure, the staff still runs to me occasionally, but they’re learning to ‘own’ their own responsibility. I even had one worker tell me today that she’s setting goals for herself.” Hotel manager Bob Schrader reinforced Shartzer’s view of the Ritz’s semi-autonomous work groups. Schrader said, “My role is to be out on the floor, not sit in my office and look at paperwork. I attend team meetings and try to get people comfortable about approaching me on issues, but then a lot of my job is directing people back to their teams for solutions. A lot of what I should be doing now is asking questions instead of dictating methods.”42 Self-managing teams differ from semi-autonomous work groups in that team members manage and control all of the major tasks directly related to production of a product or service without first getting approval from management. This includes managing and controlling the acquisition of materials, making a product or providing a service, and ensuring timely delivery. At a Crown Cork aluminum can factory in Texas, “The teams make and implement decisions regarding production, product quality, training, attendance, safety, maintenance, and certain types of discipline. The teams can stop production lines without management approval, stop delivery of cans that do
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not meet quality standards, decide which workers should receive training, decide whether to grant leave requests, and investigate and correct safety problems.”43 Self-designing teams have all the characteristics of self-managing teams, but they can also control and change the design of the teams themselves, the tasks they do and how and when they do them, and the membership of the teams. At the GE Aerospace Engines manufacturing plant in Durham, North Carolina, which makes jet engines, all workers have email addresses, access to the Internet, their own voicemail boxes, business cards, and their own desks, all of which are extremely uncommon for factory workers. Team member Duane Williams said, “We had to come up with a schedule. We had the chance to order tools, tool carts, and so on. We had to figure out the flow of the assembly line [emphasis added] that makes the engine. We were put on councils for every part of the business.” Williams went on to say, “I was never valued that much as an employee in my life. I had never been at the point where I couldn’t wait to get to work. Here, I couldn’t wait to get to work every day.”44
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self-designing team A team that has the characteristics of self-managing teams but also controls team design, work tasks, and team membership.
2.2 Special Kinds of Teams Companies are also increasingly using several other kinds of teams that can’t easily be categorized in terms of autonomy: cross-functional teams, virtual teams, and project teams. Depending on how these teams are designed, they can be either low- or high-autonomy teams. Cross-functional teams are intentionally composed of employees from different functional areas of the organization.45 Because their members have different functional backgrounds, education, and experience, cross-functional teams usually attack problems from multiple perspectives and generate more ideas and alternative solutions, all of which are especially important when trying to innovate or do creative problem solving.46 Cross-functional teams can be used almost anywhere in an organization and are often used in conjunction with matrix and product organizational structures (see Chapter 9). They can also be used either with part-time or temporary team assignments or with full-time, long-term teams. Cessna, which manufactures airplanes, created cross-functional teams for purchasing parts. With workers from purchasing, manufacturing engineering, quality engineering, product design engineering, reliability engineering, product support, and finance, each team addressed make-versus-buy decisions (make it themselves or buy from others), sourcing (who to buy from), internal plant and quality improvements, and the external training of suppliers to reduce costs and increase quality. The teams looked at every major parts category, from engines to wings to electronics. In the end, they came up with parts groups, such as sheet and plate aluminum, that could be completely outsourced to suppliers at lower cost and higher quality.47 Virtual teams are groups of geographically and/or organizationally dispersed coworkers who use a combination of telecommunications and information technologies to accomplish an organizational task.48 Members of virtual teams rarely meet face-to-face; instead, they use email, videoconferencing, and group communication software. For example, pLotdev Multimedia Developers LLC is a Web site development company of 12 people that does work for Sean Jean, P. Diddy’s clothing label, among others. Yet, the people in the company have never met. As Max Oshman, who started the company, described it, “Some of them live in the U.K., two in Croatia, two in Sweden and the rest are scattered around in southern California, New York, Texas and Amsterdam.” How do they communicate? Oshman says, “Mostly by e-mail. When we have a big project, we communicate via phone. We also have group talks using MSN Messenger.”49 Virtual teams can be employee involvement teams, self-managing teams, or nearly any kind of team discussed in this chapter. Virtual teams are
cross-functional team A team composed of employees from different functional areas of the organization.
virtual team A team composed of geographically and/or organizationally dispersed coworkers who use telecommunication and information technologies to accomplish an organizational task.
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Select people who are self-starters and strong communicators.
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Keep the team focused by establishing clear, specific goals and by explaining the consequences and importance of meeting these goals.
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Provide frequent feedback so that team members can measure their progress.
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Keep team interactions upbeat and action-oriented by expressing appreciation for good work and completed tasks.
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“Personalize” the virtual team by periodically bringing team members together and by encouraging team members to share information with each other about their personal lives. This is especially important when the virtual team first forms.
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Improve communication through increased telephone calls, emails, and Internet messaging and videoconference sessions.
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Periodically ask team members how well the team is working and what can be done to improve performance.
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Empower virtual teams so they have the discretion, freedom, and independence to decide how and when to accomplish their jobs.
Sources: W. F. Cascio, “Managing a Virtual Workplace,” Academy of Management Executive 14 (2000): 81–90; B. Kirkman, B. Rosen, P. Tesluk, & C. Gibson, “The Impact of Team Empowerment on Virtual Team Performance: The Moderating Role of Face-to-Face Interaction,” Academy of Management Journal 47 (2004): 175–192; S. Furst, M. Reeves, B. Rosen, & R. Blackburn, “Managing the Life Cycle of Virtual Teams,” Academy of Management Executive (May 2004): 6–20; C. Solomon, “Managing Virtual Teams,” Workforce 80 (June 2001), 60.
Exhibit 10.5 Tips for Managing Successful Virtual Teams
project team A team created to complete specific, onetime projects or tasks within a limited time.
often (but not necessarily) temporary teams that are set up to accomplish a specific task.50 The principal advantage of virtual teams is their flexibility. Employees can work with each other, regardless of physical location, time zone, or organizational affiliation.51 Because the team members don’t meet in a physical location, virtual teams also find it much easier to include other key stakeholders, such as suppliers and customers. Plus, virtual teams have certain efficiency advantages over traditional team structures. Because the teammates do not meet face-to-face, a virtual team typically requires a smaller time commitment than a traditional team does. Moreover, employees can fulfill the responsibilities of their virtual team membership from the comfort of their own offices, without the travel time or downtime typically required for face-to-face meetings.52 A drawback of virtual teams is that the team members must learn to express themselves in new contexts.53 The give-and-take that naturally occurs in face-to-face meetings is more difficult to achieve through videoconferencing or other methods of virtual teaming. For example, when an English-speaking member of a virtual, multinational Web site development team emailed a Russian-speaking member that the Web site design she had developed was “awesome,” the Russian-speaking member took offense and flamed an emotional email back. At that point, other members of the team, all in different locations, started sending their own nasty emails. What caused the problem? The English-to-Russian Web site on which they relied incorrectly translated “awesome” as “awful.” Chances are, this problem would not have occured if the team members were working face-to-face.54 Consistent with this example, several studies have shown that physical proximity enhances information processing.55 Therefore, some companies bring virtual team members together on a regular basis to try to minimize these problems. Pat O’Day, who manages a fiveperson virtual team at KPMG with members living in the states of Washington, Maryland, and Texas, says, “We communicate through email and conference calls and meet in person four times a year.”56 Exhibit 10.5 provides a number of tips for successfully managing virtual teams. Project teams are created to complete specific, one-time projects or tasks within a limited time.57 Project teams are often used to develop new products, significantly improve existing products, roll out new information systems, or build new factories or offices. The project team is typically led by a project manager, who has the overall responsibility for planning, staffing, and
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managing the team, which usually includes employees from different functional areas. One advantage of project teams is that drawing employees from different functional areas can reduce or eliminate communication barriers. In turn, as long as team members feel free to express their ideas, thoughts, and concerns, free-flowing communication encourages cooperation among separate departments and typically speeds up the design process.58 For example, GE Global eXchange Services used a cross-functional team to design its Web site so that it would have the same simple, intuitive-looking feel in English, French, Spanish, German, and Italian. This Web site is equally effective across all of these languages and cultures because, according to GE employee Doug Irwin, the company used a “cross-functional, cross-geography tiger team” during development. Said Irwin, “Every Wednesday morning for an hour, we’d meet on a global conference call. There were 5 to 15 of us, from all areas of the business and from all across the globe.”59 Today, GE Global eXchange Services uses its Web site (http://www.gxs.com) in 58 countries to operate one of the world’s largest business-to-business e-commerce networks, with more than 100,000 trading partners. Another advantage of project teams is their flexibility. When projects are finished, project team members either move on to the next project or return to their functional units. For example, publication of this book required designers, editors, page makeup artists, and Web designers, among others. When the task was finished, these people applied their skills to other textbook projects. Because of this flexibility, project teams are often used with the matrix organizational designs discussed in Chapter 9.
Review 2: Kinds of Teams Companies use different kinds of teams to make themselves more competitive. Autonomy is the key dimension that makes teams different. Traditional work groups (which execute tasks) and employee involvement groups (which make suggestions) have the lowest levels of autonomy. Semi-autonomous work groups (which control major, direct tasks) have more autonomy, while selfmanaging teams (which control all direct tasks) and self-designing teams (which control membership and how tasks are done) have the highest levels of autonomy. Cross-functional, virtual, and project teams are common, but are not easily categorized in terms of autonomy. Cross-functional teams combine employees from different functional areas to help teams attack problems from multiple perspectives and generate more ideas and solutions. Virtual teams use telecommunications and information technologies to bring coworkers “together,” regardless of physical location or time zone. Virtual teams reduce travel and work time, but communication may suffer since team members don’t work face-to-face. Finally, project teams are used for specific, one-time projects or tasks that must be completed within a limited time. Project teams reduce communication barriers and promote flexibility; teams and team members are reassigned to their department or new projects as old projects are completed.
Managing Work Teams “Why did I ever let you talk me into teams? They’re nothing but trouble.”60 Lots of managers have this reaction after making the move to teams. Many don’t realize that this reaction is normal, both for them and for workers. In fact, such a reaction is characteristic of the storming stage of team development (discussed in Section 3.5). Managers who are familiar with these stages and with the other important characteristics of teams will be better prepared to manage the predictable changes that occur when companies make the switch to team-based structures.
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After reading the next two sections, you should be able to understand the general characteristics of work teams. explain how to enhance work team effectiveness.
WORK TEAM CHARACTERISTICS
Understanding the characteristics of work teams is essential for making teams an effective part of an organization. Therefore, in this section you’ll learn about 3.1 team norms, 3.2 team cohesiveness, 3.3 team size, 3.4 team conflict, and 3.5 the stages of team development.
3.1 Team Norms norms Informally agreed-on standards that regulate team behavior.
Over time, teams develop norms, informally agreed-on standards that regulate team behavior.61 Norms are valuable because they let team members know what is expected of them. At Nucor Steel, work groups expect their members to get to work on time. To reinforce this norm, anyone who is late to work cannot receive the team bonus for that day (assuming the team is productive). A worker who is more than 30 minutes late cannot receive the team bonus for the entire week. At Nucor losing a bonus matters because work group bonuses can easily double the size of a worker’s take-home pay.62 Studies indicate that norms are one of the most powerful influences on work behavior. Team norms are often associated with positive outcomes, such as stronger organizational commitment, more trust in management, and stronger job and organizational satisfaction.63 In general, effective work teams develop norms about the quality and timeliness of job performance, absenteeism, safety, and honest expression of ideas and opinions. The power of norms also comes from the fact that they regulate the everyday behaviors that allow teams to function effectively. To encourage the development of team norms, trainer Tom Ruddy created a deck of 35 playing cards describing problems that Xerox’s customer service teams usually encounter. Ruddy has teams discuss each card/problem. When they agree what to do, they write their solution on the card along with the word norm. Everyone then gets a copy of the deck with the team’s norms on them. When a team norm is broken, such as one teammate cutting off another’s point, the card with the violated norm, such as “everyone’s opinion will be heard,” is played. It’s a little corny at first, but, says Ruddy, “After a while, team members internalize the proper behavior. That’s when the team really starts to click.”64 Norms can also influence team behavior in negative ways. For example, most people would agree that damaging organizational property; saying or doing something to hurt someone at work; intentionally doing one’s work badly, incorrectly, or slowly; griping about coworkers; deliberately bending or breaking rules; or doing something to harm the company or boss are negative behaviors. Nonetheless, a study of workers from 34 teams in 20 different organizations found that teams with negative norms strongly influenced their team members to engage in these negative behaviors. In fact, the longer individuals were members of a team with negative norms and the more frequently they interacted with their teammates, the more likely they were to perform negative behaviors. Since team norms typically develop early in the life of a team, these results indicate how important it is for teams to establish positive norms from the outset.65
3.2 Team Cohesiveness cohesiveness The extent to which team members are attracted to a team and motivated to remain in it.
Cohesiveness is another important characteristic of work teams. Cohesiveness is the extent to which team members are attracted to a team and motivated to remain in it.66 Burlington Northern Railroad’s intermodal team, which was charged with finding efficient ways to combine transportation through trucks
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Cohesion and Team Performance Have you ever worked in a really cohesive group where everyone liked and enjoyed each other and was glad to be part of the group? It’s great. By contrast, have you ever worked in a group where everyone really disliked each other and was unhappy to be part of the group? It’s terrible. Anyone who has had either of these experiences can appreciate how important group cohesion is and the effect it can have on team performance. Indeed, 46 studies based on 1,279 groups confirm that cohesion does matter. TEAM PERFORMANCE
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Teams generally are not suited for independent tasks that people can accomplish by themselves. When teams perform independent tasks, there is a only a 60 percent chance that cohesive teams will outperform less cohesive teams. Some caution is warranted in interpreting these results. For example, there is always the possibility that a team could become so cohesive that its team goals become more important than organizational goals. Also, teams sometimes unite around negative goals and norms that are harmful rather than helpful to organizations. Nonetheless, there is also room for even more optimism about cohesive teams. Teams that are cohesive and committed to the goals they are asked to achieve should have an even higher probability of success than the numbers shown here.67
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and trains, was a particularly cohesive team. Dave Burns, a member of that team, said, “In my mind, the key word to this team was ‘shared.’ We shared everything. There was a complete openness among us. And the biggest thing that we shared was an objective and a strategy that we had put together jointly. That was our benchmark every day. Were we doing things in support of our plan?”68 The level of cohesiveness in a group is important for several reasons. To start, cohesive groups have a better chance of retaining their members. As a result, cohesive groups typically experience lower turnover.69 In addition, team cohesiveness promotes cooperative behavior, generosity, and a willingness on the part of team members to assist each other.70 When team cohesiveness is high, team members are more motivated to contribute to the team because they want to gain the approval of other team members. For these reasons and others, studies have clearly established that cohesive teams consistently perform better.71 Furthermore, cohesive teams quickly achieve high levels of performance. By contrast, teams low in cohesion take much longer to reach the same levels of performance.72 What can be done to promote team cohesiveness? First, make sure that all team members are present at team meetings and activities. Team cohesiveness suffers when members are allowed to withdraw from the team and miss team meetings and events.73 Second, create additional opportunities for teammates to
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PHOTO COURTESY PETER B. GRAZIER, TEAMBUILDING.COM
work together by rearranging work schedules and creating common workspaces. When task interdependence is high and team members have lots of chances to work together, team cohesiveness tends to increase.74 Third, engaging in nonwork activities as a team can help build cohesion. At a company where teams put in extraordinarily long hours coding computer software, the software teams maintained cohesion by doing “fun stuff” together. Team leader Tammy Urban said, “We went on team outings at least once a week. We’d play darts, shoot pool. Teams work best when you get to know each other outside of work—what people’s interests are, who they are. Personal connections go a long way when you’re developing complex applications in our kind of time frames.”75 Finally, companies build team cohesiveness by making employees feel that they are part of a “special” organization. For example, all the new hires at Disney World in Orlando are required to take a course entitled “Traditions One,” where they learn the traditions and history of the Walt Disney Company (including the names of the seven dwarfs!). The purpose of Traditions One is to instill a sense of team pride in working for Disney.
Part of what makes teams successful is team cohesion. To create this strong bond between team members, companies frequently use activities that require team work to accomplish a common goal, like successfully exiting a maze created by corn stalks, as pictured here. More such team activities are discussed in the "Management Team Decision" at the end of the chapter.
3.3 Team Size There appears to be a curvilinear relationship between team size and performance. In other words, very small or very large teams may not perform as well as moderately-sized teams. For most teams, the right size is somewhere between six and nine members.76 This size is conducive to high team cohesion, which has a positive effect on team performance, as discussed above. A team of this size is small enough for the team members to get to know each other and for each member to have an opportunity to contribute in a meaningful way to the success of the team. At the same time, the team is also large enough to take advantage of team members’ diverse skills, knowledge, and perspectives. It is also easier to instill a sense of responsibility and mutual accountability in teams of this size.77 By contrast, when teams get too large, team members find it difficult to get to know one another, and the team may splinter into smaller subgroups. When this occurs, subgroups sometimes argue and disagree, weakening overall team cohesion. As teams grow, there is also a greater chance of minority domination, where just a few team members dominate team discussions. Even if minority domination doesn’t occur, larger groups may not have time for all team members to share their input. And when team members feel that their contributions are unimportant or not needed, the result is less involvement, effort, and accountability to the team.78 Large teams also face logistical problems, such as finding an appropriate time or place to meet. Finally, the incidence of social loafing, discussed earlier in the chapter, is much higher in large teams. Just as team performance can suffer when a team is too large, it can also be negatively affected when a team is too small. Teams with just a few people may lack the diversity of skills and knowledge found in larger teams. Also, teams that are too small are unlikely to gain the advantages of team decision making (i.e., multiple perspectives, generating more ideas and alternative solutions, and stronger commitment) found in larger teams. What signs indicate that a team’s size needs to be changed? If decisions are taking too long, if the team has difficulty making decisions or taking action, if a few members dominate the team, or if the commitment or efforts of team members are weak, chances are the team is too big. In contrast, if a team is having
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difficulty coming up with ideas or generating solutions, or if the team does not have the expertise to address a specific problem, chances are the team is too small.
3.4 Team Conflict Conflict and disagreement are inevitable in most teams. But this shouldn’t surprise anyone. From time to time, people who work together are going to disagree about what and how things get done. What causes conflict in teams? Although almost anything can lead to conflict—casual remarks that unintentionally offend a team member or fighting over scarce resources—the primary cause of team conflict is disagreement over team goals and priorities.79 Other common causes of team conflict include disagreements over task-related issues, interpersonal incompatibilities, and simple fatigue. Though most people view conflict negatively, the key to dealing with team conflict is not avoiding it, but rather making sure that the team experiences the right kind of conflict. In Chapter 5, you learned about c-type conflict, or cognitive conflict, which focuses on problem-related differences of opinion, and a-type conflict, or affective conflict, which refers to the emotional reactions that can occur when disagreements become personal rather than professional.80 Cognitive conflict is strongly associated with improvements in team performance, whereas affective conflict is strongly associated with decreases in team performance.81 Why does this happen? With cognitive conflict, team members disagree because their different experiences and expertise lead them to different views of the problem and solutions. Indeed, managers who participated on teams that emphasized cognitive conflict described their teammates as “smart,” “team players,” and “best in the business.” They described their teams as “open,” “fun,” and “productive.” One manager summed up the positive attitude that team members had about cognitive conflict by saying, “We scream a lot, then laugh, and then resolve the issue.”82 Thus, cognitive conflict is also characterized by a willingness to examine, compare, and reconcile differences to produce the best possible solution. By contrast, affective conflict often results in hostility, anger, resentment, distrust, cynicism, and apathy. Managers who participated on teams that emphasized affective conflict described their teammates as “manipulative,” “secretive,” “burned out,” and “political.”83 Not surprisingly, affective conflict can make people uncomfortable and cause them to withdraw and decrease their commitment to a team.84 Affective conflict also lowers the satisfaction of team members, may lead to personal hostility between coworkers, and can decrease team cohesiveness.85 So, unlike cognitive conflict, affective conflict undermines team performance by preventing teams from engaging in the kinds of activities that are critical to team effectiveness. So, what can managers do to manage team conflict? First, managers need to realize that emphasizing cognitive conflict alone won’t be enough. Studies show that cognitive and affective conflicts often occur together in the same teams! Therefore, sincere attempts to reach agreement on a difficult issue can quickly deteriorate from cognitive to affective conflict if the discussion turns personal and tempers and emotions flare. So, while cognitive conflict is clearly the better approach to take, efforts to engage in cognitive conflict should be approached with caution. Can teams disagree and still get along? Fortunately, they can. In an attempt to study this issue, researchers examined team conflict in 12 high-tech companies. In four of the companies, work teams used cognitive conflict to address work problems but did so in a way that minimized the occurrence of affective conflict. Exhibit 10.6 shows the steps these teams took to be able to have a “good fight.”86 First, work with more, rather than less, information. If data are plentiful, objective, and up-to-date, teams will focus on issues, not personalities. Second,
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develop multiple alternatives to enrich debate. Focusing on multiple solutions diffuses conflict by getting the team to keep searching for a better solution. Positions and opinions are naturally more flexible with five alternatives than with just two. Third, establish common goals. Remember, most team conflict arises from disagreements over team goals and priorities. There1. Work with more, rather than less, fore, common goals encourage collaboration and information. minimize conflict over a team’s purpose. Steve Jobs, 2. Develop multiple alternatives to enrich CEO of Apple Computer, explained it this way: “It’s debate. okay to spend a lot of time arguing about which route 3. Establish common goals. to take to San Francisco when everyone wants to end 4. Inject humor into the workplace. up there, but a lot of time gets wasted in such argu5. Maintain a balance of power. ments if one person wants to go to San Francisco and another secretly wants to go to San Diego.”87 Fourth, 6. Resolve issues without forcing a inject humor into the workplace. Humor relieves tenconsensus. sion, builds cohesion, and just makes being in teams fun. Fifth, maintain a balance of power by involving as many people as possible in the decision process. And sixth, resolve issues without forcing a consensus. Consensus means that everyone must agree before decisions Source: K. M. Eisenhardt, J. L. Kahwajy, & L. J. Bourgeois III, “How Management are finalized. Effectively, requiring consensus gives Teams Can Have a Good Fight,” Harvard Business Review 75, no. 4 (July-August 1997): 77–85. everyone on the team veto power. Nothing gets done until everyone agrees, which, of course, is nearly imposExhibit 10.6 How Teams Can Have a Good Fight sible. As a result, insisting on consensus usually promotes affective rather than cognitive conflict. If team members can’t agree after constructively discussing their options, it’s better to have the team leader make the final choice. Most team members can accept the team leader’s choice if they’ve been thoroughly involved in the decision process.
3.5 Stages of Team Development
forming The first stage of team development, in which team members meet each other, form initial impressions, and begin to establish team norms.
storming The second stage of team development, characterized by conflict and disagreement, in which team members disagree over what the team should do and how it should do it.
As teams develop and grow, they pass through four stages of development. As shown in Exhibit 10.7, those stages are forming, storming, norming, and performing.88 Although not every team passes through each of these stages, teams that do tend to be better performers.89 This holds true even for teams composed of seasoned executives. After a period of time, however, if a team is not managed well, its performance may start to deteriorate as the team begins a process of decline and progresses through the stages of de-norming, de-storming, and de-forming.90 Forming is the initial stage of team development. This is the gettingacquainted stage, when team members first meet each other, form initial impressions, and try to get a sense of what it will be like to be part of the team. Some of the first team norms will be established during this stage, as team members begin to find out what behaviors will and won’t be accepted by the team. During this stage, team leaders should allow time for team members to get to know each other, set early ground rules, and begin to set up a preliminary team structure. Conflicts and disagreements often characterize the second stage of team development, storming. As team members begin working together, different personalities and work styles may clash. Team members become more assertive at this stage and more willing to state opinions. This is also the stage when team members jockey for position and try to establish a favorable role for themselves on the team. In addition, team members are likely to disagree about what the group should do and how it should do it. Team performance is still relatively low, given that team cohesion is weak and team members are still reluctant to support each other. Since teams that get stuck in the storming stage are almost
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always ineffective, it is important for team leaders to focus the team on team goals and on improving team performance. Team members need to be particularly patient and tolerant with each other in this stage. Performing During norming, the third stage of team development, team members begin to settle Norming De-Norming into their roles as team members. Positive team norms will have developed by this stage, and teammates should know what to expect from each other. Petty differences should have been resolved, friendships will have develStorming De-Storming oped, and group cohesion will be relatively strong. At this point, team members will have accepted team goals, be operating as a unit, and, as indicated by the increase in performance, be working together effectively. This Forming De-Forming stage can be very short and is often characterTime ized by someone on the team saying, “I think things are finally coming together.” Note, Sources: J. F. McGrew, J. G. Bilotta, & J. M. Deeney, “Software Team Formation and Decay: however, that teams may also cycle back and Extending the Standard Model for Small Groups,” Small Group Research 30, no. 2 (1999): 209–234; B. W. Tuckman, “Development Sequence in Small Groups,” Psychological Bulletin 63, forth between storming and norming several no. 6 (1965): 384–399. times before finally settling into norming. In the last stage of team development, performing, performance improves Exhibit 10.7 because the team has finally matured into an effective, fully functioning team. Stages of Team Development At this point, members should be fully committed to the team and think of themselves as “members of a team” and not just “employees.” Team members norming often become intensely loyal to one another at this stage and feel mutual The third stage of team development, accountability for team successes and failures. Trivial disagreements, which can in which team members begin to settle take time and energy away from the work of the team, should be rare. At this into their roles, group cohesion grows, and positive team norms develop. stage, teams get a lot of work done, and it is fun to be a team member. The team should not become complacent, however, because without effective management, its performance may begin to decline as the team passes through performing The fourth and final stage of team the stages of de-norming, de-storming, and de-forming.91 Indeed, John Puckett, development, in which performance manufacturing vice president for circuit board maker XEL Communications, improves because the team has says, “The books all say you start in this state of chaos and march through these matured into an effective, fully various stages, and you end up in this state of ultimate self-direction, where functioning team. everything is going just great. They never tell you it can go back in the other direction, sometimes just as quickly.”92 In de-norming, which is a reversal of the norming stage, team performance de-norming begins to decline as the size, scope, goal, or members of the team change. With A reversal of the norming stage, in new members joining the group, older members may become defensive as estab- which team performance begins to decline as the size, scope, goal, or lished ways of doing things are questioned and challenged. Expression of ideas members of the team change. and opinions becomes less open. New members change team norms by actively rejecting or passively neglecting previously established team roles and behaviors. In de-storming, which is a reversal of the storming phase, the team’s comfort de-storming level decreases. Team cohesion weakens as more group members resist A reversal of the storming phase, in conforming to team norms and quit participating in team activities. Angry which the team’s comfort level decreases, team cohesion weakens, emotions flare as the group explodes in conflict and moves into the final stage of and angry emotions and conflict de-forming. may flare. In de-forming, which is a reversal of the forming stage, team members poside-forming tion themselves to gain control of pieces of the team. Team members begin to A reversal of the forming stage, in avoid each other and isolate themselves from team leaders. Team performance which team members position rapidly declines as the members quit caring about even minimal requirements themselves to control pieces of the team, avoid each other, and isolate of team performance. If teams are actively managed, decline is not inevitable. However, managers themselves from team leaders. need to recognize that the forces at work in the de-norming, de-storming, and
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de-forming stages represent a powerful, disruptive, and real threat to teams that have finally made it to the performing stage. Getting to the performing stage is half the battle. Staying there is the second half.
Review 3: Work Team Characteristics The most important characteristics of work teams are team norms, cohesiveness, size, conflict, and development. Norms let team members know what is expected of them and can influence team behavior in positive and negative ways. Positive team norms are associated with organizational commitment, trust, and job satisfaction. Team cohesiveness helps teams retain members, promotes cooperative behavior, increases motivation, and facilitates team performance. Attending team meetings and activities, creating opportunities to work together, and engaging in nonwork activities can increase cohesiveness. Team size has a curvilinear relationship with team performance: teams that are very small or very large do not perform as well as moderate-sized teams of six to nine members. Teams of this size are cohesive and small enough for team members to get to know each other and contribute in a meaningful way, but are large enough to take advantage of team members’ diverse skills, knowledge, and perspectives. Conflict and disagreement are inevitable in most teams. The key to dealing with team conflict is to maximize cognitive conflict, which focuses on issue-related differences, and minimize affective conflict, the emotional reactions that occur when disagreements become personal rather than professional. As teams develop and grow, they pass through four stages of development: forming, storming, norming, and performing. After a period of time, however, if a team is not managed well, its performance may decline as the team regresses through the stages of de-norming, de-storming, and de-forming. 4
ENHANCING WORK TEAM EFFECTIVENESS
Making teams work is a challenging and difficult process. Nonetheless, companies can increase the likelihood that teams will succeed by carefully managing 4.1 the setting of team goals and priorities and 4.2 how work team members are selected, 4.3 trained, and 4.4 compensated.93
4.1 Setting Team Goals and Priorities In Chapter 5, you learned that specific, measurable, attainable, realistic, and timely (i.e., S.M.A.R.T.) goals are one of the most effective means for improving individual job performance. Fortunately, team goals also improve team performance. In fact, team goals lead to much higher team performance 93 percent of the time.94 For example, Nucor Steel sets specific, challenging hourly goals for each of its production teams, which consist of first-line supervisors and production and maintenance workers. The average in the steel industry is 10 tons of steel per hour. Nucor production teams have an hourly goal of 8 tons per hour, but get a 5 percent bonus for every ton over 8 tons they produce. With no limit on the bonuses they can receive, Nucor’s production teams produce an average of 35 to 40 tons of steel per hour!95 Why is setting specific, challenging team goals so critical to team success? One reason is that increasing a team’s performance is inherently more complex than just increasing one individual’s job performance. For instance, consider that any team is likely to involve at least four different kinds of goals: each member’s goal for the team, each member’s goal for himself or herself on the team, the team’s goal for each member, and the team’s goal for itself.96 In other words, without a specific, challenging goal for the team itself (the last of the four goals listed), team members may head off in all directions at once pursuing
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these other goals. Consequently, setting a specific, challenging goal for the team clarifies team priorities by providing a clear focus and purpose. Specific, challenging team goals also affect how hard team members work. In particular, challenging team goals greatly reduce the incidence of social loafing. When faced with difficult goals, team members necessarily expect everyone to contribute. Consequently, they are much more likely to notice and complain if a teammate isn’t doing his or her share. In fact, when teammates know each other well, when team goals are specific, when team communication is good, and when teams are rewarded for team performance (discussed below), there is only a 1 in 16 chance that teammates will be social loafers.97 What can companies and teams do to ensure that team goals lead to superior team performance? One increasingly popular approach is to give teams stretch goals. Stretch goals are extremely ambitious goals that workers don’t know how to reach.98 The purpose of stretch goals is to achieve extraordinary improvements in performance by forcing managers and workers to throw away old, comfortable solutions and adopt radical, never-used-before solutions.99 Home Depot’s CEO, Bob Nardelli, who set a stretch goal to double revenues from $50 billion to $100 billion in just five years, explains stretch goals this way: “I think what has served us well [at Home Depot] is setting not unrealistic goals but challenging goals. If you set aggressive stretch goals and develop a plan and put the right leadership in place, you start to see realization. Now, will we get there as fast as we want to? Maybe not. But we will get there faster than we would have.”100 Four things must occur for stretch goals to effectively motivate teams.101 First, teams must have a high degree of autonomy or control over how they achieve their goals. At CSX’s railroad division, top management challenged the new management team at its Cumberland, Maryland office to increase productivity by 16 percent. The goal was specific and challenging: Ship the same amount of coal each month, but do it with 4,200 railcars instead of 5,000 railcars. The local team, consisting of five new managers, quickly figured out that the trains were spending too much time sitting idly in the rail yards. Finance director Peter Mills said, “We’d look out our office windows at the tracks and wonder, ‘Why aren’t the cars moving?’” The problem? Headquarters wouldn’t let the trains run until they had 160 full railcars to pull, but amassing that many cars could take nearly a week. Since the local management team had the autonomy to pay for the extra crews to run the trains more frequently, it started running trains with as few as 78 cars. Now, coal cars never wait more than a day to be transported to customers, and rail productivity has skyrocketed.102 Second, teams must be empowered with control resources, such as budgets, workspaces, computers, or whatever else they need to do their jobs. Steve Kerr, Goldman Sachs’ chief learning officer, says, “We have a moral obligation to try to give people the tools to meet tough goals. I think it’s totally wrong if you don’t give employees the tools to succeed, then punish them when they fail.”103 Third, teams need structural accommodation. Structural accommodation means giving teams the ability to change organizational structures, policies, and practices if doing so helps them meet their stretch goals. When HewlettPackard imposed tough goals on its customer service teams, one of the unintended consequences was a big increase in work stress from being called to customer sites on weekends and at all hours of the night. As a result, overworked customer service engineers began quitting their jobs, making it unlikely that the teams could achieve their stretch goals. H-P responded by giving the teams the ability to “reinvent work” in a way that would meet the stretch goals, but reduce worker stress. The teams decided to throw out existing policies on employee work hours and instead simply asked who would be willing to work Fridays through Mondays and who would be willing to work
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structural accommodation The ability to change organizational structures, policies, and practices in order to meet stretch goals.
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bureaucratic immunity The ability to make changes without first getting approval from managers or other parts of an organization.
Tuesdays through Fridays. Stress dropped immediately, and employees stopped quitting their jobs.104 Finally, teams need bureaucratic immunity. Bureaucratic immunity means that teams no longer have to go through the frustratingly slow process of multilevel reviews and sign-offs to get management approval before making changes. Once granted bureaucratic immunity, teams are immune from the influence of various organizational groups and are accountable only to top management. Therefore, teams can act quickly and even experiment with little fear of failure. Climate Engineering Corporation gave its self-directed work teams bureaucratic immunity so that they could have more control over their work and provide better service to customers. Although others in the company strongly resisted, President Eric Bindner told all repair service teams (which service heating and air-conditioning systems) that they were free to schedule regular maintenance, day-to-day jobs and repairs, and emergency nighttime and weekend repairs, as well as their own vacation time. They were also given complete control over recruiting new team members and structuring and running each team.105
4.2 Selecting People for Teamwork
The degree to which a person believes that people should be self-sufficient and that loyalty to one’s self is more important than loyalty to a team or company.
Cessna uses teams to build its small jets, like the one shown here, and has expanded the use of teams beyond manufacturing to service. The company also uses teams at its jet service center in Wichita, Kansas.
COURTESY OF CESSNA AIRCRAFT CO.
individualism-collectivism
University of Southern California professor Edward Lawler says, “People are very naive about how easy it is to create a team. Teams are the Ferraris of work design. They’re high performance but high maintenance and expensive.”106 It’s almost impossible to have an effective work team without carefully selecting people who are suited for teamwork or for working on a particular team. A focus on teamwork (individualism-collectivism), team level, and team diversity can help companies choose the right team members.107 Are you more comfortable working alone or with others? If you strongly prefer to work alone, you may not be well suited for teamwork. Indeed, studies show that job satisfaction is higher in teams when team members prefer working with others.108 An indirect way to measure someone’s preference for teamwork is to assess the person’s degree of individualism or collectivism. Individualism-collectivism is the degree to which a person believes that people should be self-sufficient and that loyalty to one’s self is more important than loyalty to one’s team or company.109 Individualists, who put their welfare and interests first, generally prefer independent tasks in which they work alone. In contrast, collectivists, who put group or team interests ahead of self-interests, generally prefer interdependent tasks in which they work with others. Collectivists would also rather cooperate than compete and are fearful of disappointing team members or of being ostracized from teams. Given these differences, it makes sense to select team members who are collectivists rather than individualists. Indeed, many companies use individualism-collectivism as an initial screening device for team members. For example, when selecting workers for its team-based approach to manufacturing single-engine planes, Cessna focuses exclusively on team skills. If tests indicate that you aren’t a “team player” with an aptitude and willingness to take on responsibility and work with others, Cessna doesn’t hire you.110 If team diversity is desired, however, individualists may also be appropriate, as discussed below.
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team level The average level of ability, experience, personality, or any other factor on a team.
team diversity The variances or differences in ability, experience, personality, or any other factor on a team.
Exhibit 10.8 The Team Player Inventory STRONGLY AGREE
STRONGLY DISAGREE
To determine your preference for teamwork, take the Team Player Inventory shown in Exhibit 10.8. Team level is the average level of ability, experience, personality, or any other factor on a team. For example, a high level of team experience means that a team has particularly experienced team members. This does not mean that every member of the team has considerable experience, but that enough team members do to significantly raise the average level of experience on the team. Team level is used to guide selection of teammates when teams need a particular set of skills or capabilities to do their jobs well. For example, at GE’s Aerospace Engines manufacturing plant in Durham, North Carolina, everyone hired had to have an FAA-certified mechanic’s license. Following that, all applicants were tested in 11 different areas, only one of which involved those technical skills. Keith McKee, who works at the plant, said, “You have to be above the bar in all 11 of the areas: helping skills, team skills, communication skills, diversity, flexibility, coaching ability, work ethic, and so forth. Even if just one thing out of the 11 knocks you down, you don’t come to work here.”111 Whereas team level represents the average level or capability on a team, team diversity represents the variances or differences in ability, experience, personality, or any other factor on a team.112 From a practical perspective, why is team diversity important? Professor John Hollenbeck explains, “Imagine if you put all the extroverts together. Everyone is talking, but nobody is listening. [By contrast,] with a team of [nothing but] introverts, you can hear the clock ticking on the wall.”113 In other words, strong teams not only have talented members (i.e., team level), but those talented members are also different in terms of ability, experience, or personality. For example, teams with strong team diversity on job experience have a mix of team members, ranging from seasoned veterans to people with three or four years of experience to rookies with little or no experience. When Cessna built a brand new manufacturing plant for its single-engine Skyhawk planes in a new location, none of the new
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Reverse score items 2, 4, 5, 7, and 9. Then add the scores for items 1 to 10. Higher scores indicate a preference for teamwork, whereas lower total scores indicate a preference for individual work. Source: T. J. B. Kline, “The Team Player Inventory: Reliability and Validity of a Measure of Predisposition Toward Organizational Team-Working Environments,” Journal for Specialists in Group Work 24, no. 1 (1999): 102–112.
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workers it hired for its teams had any manufacturing experience whatsover. Having passed Cessna’s team skills tests, they were all great team players, but none had ever worked in a factory. Consequently, Cessna infused the teams with diversity by bringing in 60 retirees who had built Skyhawks before. The mentors worked with the teams, teaching them basic manufacturing skills, and instilling confidence.114 As in this example, team diversity is used to guide the selection of team members when teams must complete a wide range of different tasks or when tasks are particularly complex. Once the right team has been put together in terms of individualismcollectivism, team level, and team diversity, it’s important to keep the team together as long as practically possible. Interesting research by the National Transportation Safety Board shows that 73 percent of the serious mistakes made by jet cockpit crews are made the very first day that a crew flies together as a team and that 44 percent of serious mistakes occur on their very first flight together (pilot teams fly two to three flights per day). Moreover, research has shown that fatigued pilot crews who have worked together before make significantly fewer errors than rested crews who have never worked together.115 Their experience working together helps them overcome their fatigue and outperform new teams that have not worked together before. So, once you’ve created effective teams, keep them together as long as possible.
4.3 Team Training
interpersonal skills Skills, such as listening, communicating, questioning, and providing feedback, that enable people to have effective working relationships with others.
After selecting the right people for teamwork, you need to train them. And, to be successful, teams need significant training, particularly in interpersonal skills, decision making and problem solving, conflict resolution, and technical training. Team leaders need training, too. Organizations that create work teams often underestimate the amount of training required to make teams effective. This mistake occurs frequently in successful organizations, where managers assume that if employees can work effectively on their own, they can work effectively in teams. In reality, companies that successfully use teams provide thousands of hours of training to make sure that teams work. Stacy Myers, a consultant who helps companies implement teams, says, “When we help companies move to teams, we also require that employees take basic quality and business knowledge classes as well. Teams must know how their work affects the company, and how their success will be measured.”116 Most commonly, members of work teams receive training in interpersonal skills. Interpersonal skills, such as listening, communicating, questioning, and providing feedback, enable people to have effective working relationships with others. Because of teams’ autonomy and responsibility, many companies also give team members training in decision-making and problem-solving skills to help them do a better job of cutting costs and improving quality and customer service. At General Motors’ automobile assembly plant in Lansing, Michigan, each employee working on the assembly line receives 250 classroom hours of training, most of it in problem solving. According to Tim Lee, the group director of manufacturing for GM’s North American car group, “Problem solving is not an easy task. Typically, in a plant we treat the symptoms, not the problem.”117 Many organizations also teach teams conflict resolution skills. “Teams at Delta Faucet have specific protocols for addressing conflict. For example, if an employee’s behavior is creating a problem within a team, the team is expected to work it out without involving the team leader. Two team members will meet with the ‘problem’ team member and work toward a resolution. If this is unsuccessful, the whole team meets and confronts the issue. If necessary, the team leader can be brought in to make a decision, but . . . it is a rare occurrence for a team to reach that stage.”118
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Firms must also provide team members with the technical training they need to do their jobs, particularly if they are expected to perform all of the different jobs on the team (i.e., cross training). Before teams were created at Milwaukee Mutual Insurance, separate employees performed the tasks of rating, underwriting, and processing insurance policies. After extensive cross training, however, each team member can now do all three jobs.119 Cross training is less appropriate for teams of highly skilled workers. For instance, it is unlikely that a group of engineers, computer programmers, and systems analysts would be cross-trained for each other’s jobs. Finally, companies need to provide training for team leaders, who often feel unprepared for their new duties. Exhibit 10.9 shows the top 10 problems reported by new team leaders. These range from confusion about their new roles as team leaders (compared to their old jobs as managers or employees) to not knowing where to go for help when their teams have problems. The solution is extensive training for team leaders.
4.4 Team Compensation and Recognition Compensating teams correctly is very difficult. For instance, one survey found that only 37 percent of companies were satisfied with their team compensation plans and even fewer, just 10 percent, reported being “very positive.”120 One of the problems, according to Monty Mohrman of the Center for Effective Organizations, is that “there is a very strong set of beliefs in most organizations that people should be paid for how well they do. So when people first get put into team-based organizations, they really balk at being paid for how well the team does. It sounds illogical to them. It sounds like their individuality and their sense of self-worth are being threatened.”121 Consequently, companies need to carefully choose a team compensation plan and then fully explain how teams will be rewarded. One basic requirement for team compensation to work is that the level of rewards (individual versus team) must match the level of performance (individual versus team). Employees can be compensated for team participation and accomplishments in three ways: skill-based pay, gainsharing, and nonfinancial rewards. Skill-based pay programs pay employees for learning additional skills or knowledge.122 These programs encourage employees to acquire the additional skills they will need to perform multiple jobs within a team and to share knowledge with others within their work groups.123 For example, at XEL Communications, the number of skills each employee has mastered determines his or her individual pay. An employee who takes a class and on-the-job training in advanced soldering (XEL makes circuit boards) will earn 30 cents more per hour. Passing a written test or satisfactorily performing a skill or job for a
skill-based pay A compensation system that pays employees for learning additional skills or knowledge.
Exhibit 10.9 Top 10 Problems Reported by Team Leaders
1. Confusion about their new roles and about what they should be doing differently. 2. Feeling they’ve lost control. 3. Not knowing what it means to coach or empower. 4. Having personal doubts about whether the team concept will really work. 5. Uncertainty about how to deal with employees’ doubts about the team concept. 6. Confusion about when a team is ready for more responsibility. 7. Confusion about how to share responsibility and accountability with the team. 8. Concern about promotional opportunities, especially about whether the “team leader” title carries any prestige. 9. Uncertainty about the strategic aspects of the leader’s role as the team matures. 10. Not knowing where to turn for help with team problems, as few, if any, of their organization’s leaders have led teams. Source: B. Filipczak, M. Hequet, C. Lee, M. Picard, & D. Stamps, “More Trouble with Teams,” Training, Octobert 1996, 21.
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supervisor or trainer certifies mastery of new skills and results in increased pay. Eastman Chemical uses a similar approach with its teams, but team members also have to demonstrate that they use their new skills at least 10 percent of the time. Otherwise, they Gainsharing (different 12.2% Merit-Based Team Pay payouts to teams depending lose their pay increase.124 (adjust within teams for on how much each saved the differences in individual In gainsharing programs, companies company, but with equal 14.2% performance) 40% share the financial value of perforpayouts within teams) mance gains, such as productivity, cost savings, or quality, with their work19% ers.125 Over the last 25 years, the U.S. 13.7% Postal Service (USPS) has lost $9 billion. Recently, however, a gainsharing Gainsharing (equal payouts to all teams and team program for its 84,000 supervisors promembers) duced annual savings of $497 million Merit-Based Team Pay for the USPS and average annual gain(equal shares within teams) sharing payments of $3,100 for each supervisor. Thanks to cost-saving sugSource: J. H. Sheridan, “ ‘YES’ to Team Incentives,” Industry Week, 4 March 1996, 63. gestions, improved productivity, and better management, on-time delivery of Exhibit 10.10 first class mail increased by 10 percent, the number of workdays lost to injury Managers’ Preferences for dropped significantly, and, most impressively of all, the USPS had five straight Team-Based Pay years of positive net income. Nonetheless, Congress killed the USPS gainsharing gainsharing program by passing a law prohibiting payment of any gainsharing savings to A compensation system in which employees any year the USPS lost money (which it has done the last few companies share the financial value years).126 of performance gains, such as Nonfinancial rewards are another way to reward teams for their perforproductivity, cost savings, or quality, mance. These rewards, which can range from vacation trips to T-shirts, plaques, with their workers. and coffee mugs, are especially effective when coupled with management recognition, such as awards, certificates, and praise.127 Nonfinancial awards tend to be most effective when teams or team-based interventions, such as total quality management (see Chapter 18), are first introduced.128 Which team compensation plan should your company use? In general, skillbased pay is most effective for self-managing and self-directing teams performing complex tasks. In these situations, the more each team member knows and can do, the better the whole team performs. By contrast, gainsharing works best in relatively stable environments where employees can focus on improving the productivity, cost savings, or quality of their current work system. Finally, given the level of dissatisfaction with most team compensation systems, what compensation plans would today’s managers like to use with the teams in their companies? As shown in Exhibit 10.10, 40 percent of managers would directly link merit pay increases to team performance, but allow adjustments within teams for differences in individual performance. By contrast, 13.7 percent would link merit-based increases directly to team performance and give each team member an equal share of the team’s merit-based reward. Nineteen percent would use gainsharing plans based on quality, delivery, productivity, or cost reduction and then provide equal payouts to all teams and team members. Another 14.5 percent would also use gainsharing, but they would vary the team gainsharing award, depending on how much money the team saved the company. Payouts would still be equally distributed within teams. Finally, 12.2 percent of managers would opt for plantwide profit-sharing plans tied to overall company or division performance.129 In this case, there would be no payout distinctions between or within teams. Plantwide Profit Sharing (based on overall company or division performance, but with equal payouts to all teams and team members)
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Review 4: Enhancing Work Team Effectiveness Companies can make teams more effective by setting team goals and managing how team members are selected, trained, and compensated. Team goals provide a clear focus and purpose, reduce the incidence of social loafing, and lead to higher team performance 93 percent of the time. Extremely difficult stretch goals can be used to motivate teams as long as teams have autonomy, control over resources, structural accommodation, and bureaucratic immunity. Not everyone is suited for teamwork. When selecting team members, companies should select people who have a preference for teamwork (individualismcollectivism) and should consider team level (average ability on a team) and team diversity (different abilities on a team). Organizations that successfully use teams provide thousands of hours of training to make sure that teams work. The most common types of team training are for interpersonal skills, decisionmaking and problem-solving skills, conflict resolution, technical training to help team members learn multiple jobs (i.e., cross training), and training for team leaders. Employees can be compensated for team participation and accomplishments in three ways: skill-based pay, gainsharing, and nonfinancial rewards.
Key Terms bureaucratic immunity, 326 cohesiveness, 318 cross-functional team, 315 cross training, 308 de-forming, 323 de-norming, 323 de-storming, 323 employee involvement team, 314 forming, 322 gainsharing, 330
individualism-collectivism, 326 interpersonal skills, 328 norming, 323 norms, 318 performing, 323 project team, 316 self-designing team, 315 self-managing team, 314 semi-autonomous work group, 314 skill-based pay, 329
social loafing, 309 storming, 322 structural accommodation, 325 team diversity, 327 team level, 327 traditional work group, 313 virtual team, 315 work team, 306
Concept Check 1. What are the advantages and disadvantages of teams? 2. How does a manager know when to use teams and when not to use teams? 3. Sketch the team autonomy continuum and describe the five teams with different levels of autonomy. 4. Describe the three types of special teams that do not fit easily onto the team autonomy continuum. 5. Outline the stages of team development and briefly describe what happens at each stage.
6. What role does cohesiveness play in team performance? 7. Describe the two main types of conflict that occur in teams. How can teams use conflict effectively? 8. What should managers consider when selecting employees for teamwork? 9. What must happen for stretch goals to appropriately motivate teams? 10. What challenges do companies face when compensating employees for work done in teams?
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Self- Assessment WORKING IN GROUPS From sports to school to work to civic involvement, working in teams is increasingly part of our experience. Even though teams are more and more common ways of getting work done, people still have widely varying opinions of their value. Think of your own situation. When a professor divides the class into groups to complete a project, do you respond with an inward smile or
a heavy sigh? Do you enjoy team projects, or would you rather just do your own work? The Self-Assessment Appendix has a 20-question survey that can give you insights into your thoughts about working in teams. Turn to page 619 and complete the assessment for some baseline information on your attitudes toward group work.
Management Decision WHAT ACTUALLY CONSTITUTES TEAM TRAINING? What would you do to build a sense of camaraderie among your team members?130 Walk across a bed of nails together? Hot coals? What about putting together a circus complete with trapeze and high wire or a rodeo with mechanical bulls and cattle branding? EMC, Burger King, Genentech, Adobe Systems, Pepsi, Goodyear, and Hewlett-Packard are among the companies that have sent employees to some rather outlandish team-building camps. Burger King enrolls employees in a fire-walking seminar during which they also march across a bed of nails. Adobe and Genentech have sponsored work team circuses, and Pepsi, Goodyear, and HP have sent employees to Mid-Ohio Speedway for seminars in race-car driving. If these exercises are too tame, Teambuildinginc.com offers beekeeping and honey gathering, rattlesnake hunts, skydiving, bull riding, paintball wars, and an activity called Junkyard Sports, in which participants must create the equipment for the sport of their choice from a pile of junk such as old socks, boxes, and tinfoil. Similarly, a company called CRG Total Event Solutions has an activity called Junkyard Scooters. Each team receives a tool kit and must build a scooter from a pile of thriftstore items like ironing boards, toys, tarps, and wheels. Team cooking events are also growing in popularity. In Chili Challenge, offered by a California-based company called Chaminade, teams must devise a chili recipe from a selection of 50 ingredients and then cook the dish within an hour. The team with the best tasting chili is the winner. Similarly, at the Indian Lakes Golf Resort and Conference Center in Bloomington, Illinois, teams
are given a box containing ingredients for one of the items on the hotel’s menu. Each team concocts a dish from the ingredients, and the team coming closest to the actual dish is named the winner. For a more intensely realistic experience, your team can do simulated hostage negotiations. NASA offers an experience in which teams work together to simulate a space shuttle launch. Stylish teams can stomp grapes and make Merlot. In Barbie Heroism, developed by a consulting company called Total Rebound, four team members use cranks and pulleys to operate a toy helicopter in an effort to rescue a school of floating Barbies from deadly plastic sharks. Although these exercises vary widely in their effectiveness, companies are still shelling out big bucks for team coaching, proving that teamwork is seen as an essential part of the management tool kit. Though some employees might balk at the rattlesnake hunt or the beekeeping exercise, it’s probably not too difficult to rally the troops around the race-car driving or NASA seminars. Questions 1. Do the activities mentioned above qualify as team training? Why or why not? 2. Based on the limited descriptions given, rank the activities according to how well you think they (a) teach teamwork skills and (b) foster team spirit. Your two lists may not be the same. Explain your rankings. Are some activities more appropriate for certain kinds of teams, for example, circus activities for cross-functional teams or making Merlot for self-managing teams?
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Management Team Decision TAKING A CHANCE ON TEAMS AT IBM Evenings at home are the only time you can look over your management team’s monthly reports without interruptions.131 Tonight, you’re quietly sipping coffee (decaf, naturally) as you review the reports in the comfort of your favorite chair. You are suddenly jarred, however, by a single line deep in one report, which might have gone unnoticed if you hadn’t carved out this time away from the office. In discussing the prospects for a new opportunity, one of your managers wrote, “Pressures in the current quarter have forced us to cut costs by discontinuing efforts in this promising new area.” Unbelievable! As you continue reading, you can’t get this line out of your head. Why is the company abandoning “promising” avenues of growth and revenue because of external pressures? You finish reading the reports and resolve to discuss the issue with all of your managers—not just the one who wrote the report. The next morning, you ask your senior vice president to investigate, and in short order, he discovers a pattern of nonconversion. In other words, even though your company, IBM, obtains thousands of patents each year, management seems to have tremendous difficulties turning its basic research into functioning businesses. The reason apparently stems from the company’s focus on existing markets and short-term results. Rather than focusing on turning new ideas into new products and services, IBM’s most talented and experienced executives are being rewarded based on how much revenue their divisions generate and the number of employees reporting to them. Not surprisingly, they’re more concerned with growing existing products and services than they are with developing new products and services for the future. As a result, IBM has left many innovations
on the table for outsiders to scoop up. For example, IBM invented the relational database and the router, but it was Oracle and Cisco that built huge companies around them. You call your management team together and pose this problem: “How are we going to transform the work of our research scientists into new businesses? We need to figure out how to recognize and nurture these emerging business opportunities. IBM has hundreds of thousands of employees and billions of dollars in revenue. Surely, we have enough resources to commercialize our great ideas!” In response, your VP for strategy says, “I wonder if we could do it with teams.” For this Management Team Decision, assemble five to six students to act as the management team at IBM. Questions 1. Are teams a good idea for IBM’s emerging business opportunities (EBOs) given the company’s culture and well-defined organization? Why or why not? 2. If you do use teams, what kind of team would be best in the situation described? In other words, how much autonomy should teams working on EBOs have? 3. Who would you choose to lead the EBO teams— experienced executives who are successfully managing established divisions or less experienced managers who want to prove themselves? Explain your rationale. (You may want to review Chapter 1, section 3, “Kinds of Managers.”) 4. What will your management team need to do to help EBO teams be successful? After all, the whole point of looking into EBOs is to increase IBM’s revenue and reach.
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Develop Your Career Potential EVALUATE YOUR TEAM SKILLS Instructions: Step 1: Answer the following questions the way that you think other members of your team would if they were describing your actions.132 Step 2: Total your score for each section. Then transfer all totals to the “A Quick Check of My Team Skills” section at the conclusion of the exercise. Scale: 1 = Almost never 2 = Seldom 3 = Sometimes 4 = Usually 5 = Almost always I. Honor team values and agreements. As a team member, I a. show appreciation for other team members’ ideas. _____________ b. help other team members cope with change. ______ c. encourage others to use their strengths. __________ d. help the team develop a productive relationship with other teams. _____________ e. willingly assume a leadership role when needed. _____________
Total: _____________ II. Promote team development. As a team member, I a. volunteer for all types of tasks, including the hard ones. _____________ b. help orient and train new team members. _________ c. help organize and run effective meetings. __________ d. help examine how we are doing as a team and make any necessary changes in the way we work together. _____________ e. help identify milestones and mini-successes to celebrate. _____________
Total: _____________ III. Help make team decisions. As a team member, I a. analyze what a decision entails. _____________ b. ensure that the team selects and includes the appropriate people in the decision process. ____________ c. clearly state my concerns. _____________ d. search for common ground when team members have different views. _____________ e. actively support the team’s decisions. _____________ Total: _____________
IV. Coordinate and carry out team tasks. As a team member, I a. help identify the information, skills, and resources necessary to accomplish team tasks. _____________ b. help formulate and agree on a plan to meet performance goals. _____________ c. stay abreast of what is happening in other parts of the organization and bring that information to the team. _____________ d. find innovative ways to meet the needs of the team and of others in the organization. _____________ e. maintain a win-win outlook in all dealings with other teams. _____________ Total: _____________ V. Handle difficult issues with the team. As a team member, I a. bring team issues and problems to the team’s attention. _____________ b. encourage others on the team to state their views. _____________ c. help build trust among team members by speaking openly about the team’s problems. _____________ d. give specific, constructive, and timely feedback to others. _____________ e. admit when I’ve made a mistake. _____________ Total: _____________ A Quick Check of My Team Skills Category Total Score Honor team values and ______________________ agreements. Promote team develoment. ______________________ Help make team decisions. ______________________ Coordinate and carry out ______________________ team tasks. Handle difficult issues with ______________________ the team. Interpreting Scores
• A score of 20 or above in any activity indicates an area of strength. • A score of below 20 in any activity indicates an area that needs more attention. Questions to Ask Yourself Looking at your scores, what areas are strengths? How can you maintain these strengths? What areas are weaknesses? What steps can you take to turn these areas into strengths?
Take Two
Biz Flix Apollo 13
This film re-creates the heroic efforts of astronaut Jim Lovell (Tom Hanks), his crew, NASA, and Mission Control to return the damaged Apollo spacecraft to earth. Examples of both problem solving and decision making occur in almost every scene. This scene takes place during day 5 of the mission about two-thirds of the way through the film. Early in Apollo 13’s mission Jack Swigert (Kevin Bacon) stirred the oxygen tanks at the request of Mission Control. After this procedure, an explosion occurred, causing unknown damage to the command module. Before the scene takes place, the damage has forced the crew to move into the LEM (Lunar Exploration Module), which becomes their lifeboat for return to earth. What to Watch for and Ask Yourself
1. What triggers the conflict in this scene? 2. Is this intergroup conflict or intragroup conflict? What effects can such conflict have on the group dynamics on board Apollo 13? 3. Does mission commander Jim Lovell successfully manage the group dynamics to return the group to a normal state?
Management Workplace Orange Tree Imports
As you read in the chapter, the number of companies using teams is growing, but despite the popularity of teams, the challenges in managing teams are not diminishing. Carol and Dean Schroeder own Orange Tree Imports, a specialty gift shop with 30 employees who generate nearly $2 million in annual sales. To get such outstanding results, the Schroeders have experimented with various techniques as they define team structures at their company. What to Watch for and Ask Yourself
1. Does the video describe teams or workgroups? Explain. 2. Classify the employees at Orange Tree Imports using the team autonomy continuum. Why did you put it where you did? 3. Is a retail store an appropriate place for using teams?
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C H A P T E R
O U T L I N E
Chapter11 What Would You Do? Determining Human Resource Needs 1. Human Resource Planning 1.1 Forecasting Demand and Supply 1.2 Human Resource Information Systems
2. Employment Legislation 2.1 Federal Employment Laws 2.2 Adverse Impact and Employment Discrimination 2.3 Sexual Harassment
Finding Qualified Workers 3. Recruiting 3.1 Job Analysis and Recruiting 3.2 Internal Recruiting 3.3 External Recruiting
4. Selection 4.1 Application Forms and Résumés 4.2 References and Background Checks 4.3 Selection Tests 4.4 Interviews
Developing Qualified Workers 5. Training
5.1 Determining Training Needs 5.2 Training Methods 5.3 Evaluating Training
STUDENT RESOURCES
6. Performance Appraisal 6.1 Accurately Measuring Job Performance 6.2 Sharing Performance Feedback
Keeping Qualified Workers 7. Compensation 7.1 Compensation Decisions 7.2 Employment Benefits
8. Employee Separations 8.1 8.2 8.3 8.4
Terminating Employees Downsizing Retirement Employee Turnover
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise Xtra! Ten exhibit worksheets, author’s FAQs, quiz, Management News, a sample sexual harassment policy, and the video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
Domino’s Pizza Headquarters, Detroit, Michigan.1 “Hey boss, where’s the driver? These pizzas are ready to go and we’ve only got 15 minutes to deliver them. Did the driver show up?” No, the driver didn’t, and he probably won’t show up tomorrow, either. After a few months on the job, most drivers, cashiers, and pizza makers simply stop coming to work. In fact, at Domino’s Pizza, company-wide turnover is 158 percent. That means Domino’s must recruit, hire, and train 180,000 people a year just to fill its company’s 114,000 jobs. And, with that much turnover, you can’t consistently produce a quality product. Making and delivering pizza may seem simple, but up the ante to making and delivering one million pizzas each night, as Domino’s does, and all of a sudden it’s not quite so easy, especially if you’re always working with inexperienced workers. For instance, even a simple job like order taking has a learning curve when you’re taking 45 to 50 orders an hour. In fact, a new order taker usually requires 80 hours to become as reliable as an experienced one. Until they learn their jobs, new workers make lots of mistakes, such as getting orders wrong, giving out the wrong change, and showing up at customers’ homes with the wrong pizza. And those mistakes are costly in two ways. First, if the order is wrong, or late, or missing, customers get angry and may not do business with you again. Indeed, according to the University of Michigan’s American consumer satisfaction index, Domino’s ranks in the bottom half of fastfood companies. Second, to right those wrongs, Domino’s often says the pizza is free—“Our fault, no charge.”—and that hurts profits. So much turnover is costly in other ways as well. For one thing, it costs time and money to
What Would You Do?
find and hire new workers. Domino’s estimates that it costs $2,500 to replace each hourly worker who leaves and $20,000 to replace a store manager. Then, all those new workers must be trained, and that takes time and money. At Domino’s, each new worker spends the first 30 days in training, learning how to take orders, handle the cash register, make pizza dough, and, ultimately, how to make a pizza in less than a minute. When everything is considered, turnover is costing the company several hundred million dollars a year, or an astonishing 15 to 20 percent of revenues. The question, of course, is what to do about it. One thing you have to st0p doing is simply hiring the next warm body that walks through the door. But, how do you find qualified applicants? Then, how do you select or screen people for making and delivering pizza, handling the cash register, and taking orders? Are interviews enough? Once you’ve found workers, how do you get them to stay more than a few months? Most of your jobs pay minimum wage. Should you increase pay the way Starbucks has, or should you focus on other STUDY TIP things? You have to be realistic Use the chapter outline on about this, as nobody stays in the proceeding page as a these jobs forever. But, if you study tool. After reading the can get people to stay three whole chapter, return to the months, they’ll often stay a year or two. Again, what’s the list and write a summary of best way to make that happen? each item. Check your work Finally, there must be a link by reading the actual review between employee turnover paragraphs on pages 342, and management turnover, so 346, 351, 359, 364, 368, what should you do to encourage managers to stay? Assis372, and 376. tant managers make $8 to $10 an hour, and store managers earn an average of $32,000 per year. Just raising pay isn’t the answer, however. The way those managers are rewarded matters, too. So what changes will you make in that area? If you were in charge at Domino’s, what would you do?
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human resource management (HRM) The process of finding, developing, and keeping the right people to form a qualified work force.
As the problems facing Domino’s Pizza show, human resource management (HRM), or the process of finding, developing, and keeping the right people to form a qualified work force, is one of the most difficult and important of all management tasks. This chapter is organized around the four parts of the human resource management process shown in Exhibit 11.1: determining human resource needs and attracting, developing, and keeping a qualified work force. Accordingly, the chapter begins by reviewing how human resource planning determines human resource needs, such as the kind and number of employees a company requires to meet its strategic plans and objectives. Next, we explore how companies use recruiting and selection techniques to attract and hire qualified employees to fulfill those needs. The third part of the chapter discusses how training and performance appraisal can develop the knowledge, skills, and abilities of the work force. The chapter concludes with a review of compensation and employee separation, that is, how companies can keep their best workers through effective compensation practices and how they can manage the separation process when employees leave the organization.
Determining Human Resource Needs Should we hire more workers? What should we pay our current employees to slow employee turnover? What kinds of training do our new employees need Exhibit 11.1 to be prepared to do a good job, and what’s the best way to deliver that trainThe Human Resource Management ing? In other words, what are our human resource needs, and what’s the best Process way to address them? The human resource management process, shown in Exhibit 11.1, can provide answers to these questions. We can see how the HRM process works by examining what Determining Human hospitals are doing to address the shortage of qualified nurses around Human Resource Resource Planning Needs the world (i.e., their human resource needs). How acute is this shortage? Hospitals in London, England, find it so difficult to attract British nurses that they have sent managers all the way to Jamaica to recruit English-speaking nurses. But Jamaica has lost so many nurses Recruiting to English hospitals that it now prevents the British government Attracting (which runs the health system in Britain) from hiring its nurses. And Qualified why do British hospitals have such a hard time finding nurses? Employees Because Canadian nurses take higher-paying jobs in the United States, Selection which forces Canadian hospitals to hire British nurses and British hospitals to hire nurses from Ghana (since they can no longer hire Jamaican nurses). The nursing shortage is so severe worldwide, however, that even American hospitals now recruit directly in many counTraining tries. In South Africa and the Philippines, nurses are encouraged to Developing come to the United States with ads that say, “Nurses! Think of it as Qualified your seat in America. Gain invaluable experience, learn the latest Employees medical techniques, and live a fuller life in a relaxed environment.”2 Performance And, like all workers, nurses who work in poor conditions for poor Appraisal pay are willing to move to other countries for better-paying jobs in good companies. So, for the hospitals around the world that struggle to hire nurses, the HRM process, as shown in Exhibit 11.1, comes full Compensation circle as attracting, developing, and then keeping qualified nurses affect their human resource needs. Keeping Qualified Employees
Employee Separation
1 2
After reading the next two sections, you should be able to describe the basic steps involved in human resource planning. explain how different employment laws affect human resource practice.
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HUMAN RESOURCE PLANNING
Human resource planning (HRP) is the process of using an organization’s goals and
human resource planning (HRP)
strategy to forecast the organization’s human resource needs in terms of attracting, developing, and keeping a qualified work force.3 Importantly, companies that don’t use HRP or that do it poorly may end up with either a surplus of employees that has to be corrected with layoffs or a shortage of employees that leads to increased overtime costs and an inability to meet demand for the company’s product or service.
Using an organization’s goals and strategy to forecast the organization’s human resource needs in terms of attracting, developing, and keeping a qualified work force.
Let’s explore human resource planning by examining how to 1.1 forecast the demand and supply of human resources and 1.2 use human resource information systems to improve those forecasts.
1.1 Forecasting Demand and Supply Work force forecasting is the process of predicting the number and kind of workers with specific skills and abilities that an organization will need in the future.4 There are two kinds of work force forecasts, internal and external forecasts, and three kinds of forecasting methods—direct managerial input, best guess, and statistical/historical ratios. Internal forecasts are projections about factors within the organization that affect the supply and demand for human resources. These factors include the financial performance of the organization, its productivity, its mission, changes in technology or the way the work is performed, and terminations, promotions, transfers, retirements, resignations, and deaths of current employees. For example, a drop in profits prompted Union Pacific Corporation, a railroad company, to use attrition and an early retirement program to cut 2,000 workers. Nonetheless, it didn’t lay off train dispatchers who, through effective scheduling of company trains and cargo, have a huge effect on company productivity. Barbara Schaefer, Union Pacific’s senior vice president for human resources, said, “They’re not being offered the pension enhancement. We can’t afford to lose them.”5 Exhibit 11.2 provides a more complete list of factors that influence internal forecasts. External forecasts are projections about factors outside the organization that affect the supply and demand for human resources. These factors include the labor supply for specific types of INTERNAL FACTORS workers, the economy (unemployment New positions rate), labor unions, demographics of New equipment and the labor force (e.g., proportion of technology labor force in various age groups), geoEliminated positions graphic movement of the labor force, Terminations strength of competitors, and growth in Retirements particular businesses and markets. For Resignations Work example, when the economy slowed, Force Turnover Behlen Manufacturing switched its 400 Forecast Transfers factory workers from full-time to partDeaths time work and cut the pay of its Promotions salaried workers by 10 percent. CEO Organization’s mission Tony Raymundo said, “This year, Productivity of current we’ve been reducing hours and telling employees people we believed it was short-term. Skills/education of current employees We think we saved a lot of jobs by doing that.”6 When the economy strengthened and sales began increasing
work force forecasting The process of predicting the number and kind of workers with specific skills and abilities that an organization will need in the future.
Exhibit 11.2 Internal and External Factors That Influence Work Force Forecasting
EXTERNAL FACTORS Demographics of labor supply Geographic population shifts Shift from manufacturingto service- to informationbased economy General economic conditions Unemployment rate Labor unions Availability of applicants with specific skills and education Technological advances Strength and number of competitors Growth in particular businesses and markets
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again, he quickly switched his factory workers back to full-time hours and removed the 10 percent pay cut. Exhibit 11.2 provides a more complete list of factors that influence external forecasts. Three kinds of forecasting methods—direct managerial input, best guess, and statistical/historical ratios—are often used to predict the number and kind of workers with specific skills and abilities that an organization will need in the future.7 The most common forecasting method, direct managerial input, is based on straightforward projections of cash flows, expenses, or financial measures, such as return on capital. Though financial indicators are relatively quick to calculate and can help managers determine how many workers might be needed, they don’t help managers decide which critical skills new employees should possess. The best guess forecasting method is based on managers’ assessment of current head count, plus a best guess of how internal factors and external factors will affect that head count. Totaling these produces the overall projection. Dell Inc., in part, uses a best guess system to forecast the kinds of people it would like to hire. Steve Price, Dell’s vice president of human resources for its Public and Americas International Group, says, “We look at the people who have been given the biggest merit increases, the best appraisals and so forth, and then we interview against these competencies.”8 Finally, the statistical/historical ratios forecasting method uses statistical methods, such as multiple regression, in combination with historical data, to predict the number and kind of workers a company should hire. For example, a manager might run a regression analysis using data from the last two years. In this analysis, the number of employees that need to be hired is the dependent (predicted) variable, and the number of items manufactured, number of clients, average increase in sales, and similar factors are the independent (predictor) variables. The regression analysis produces a simple equation that indicates how many more employees should be added for each increase in the independent variables, such as items manufactured or increased sales. This approach takes advantage of existing data and can be much more accurate than best guess predictions, but only if a company’s internal and external environments have not changed significantly. Dell also uses statistical/historical ratios to help predict its work force needs. Andy Esparza, vice president of staffing for Dell’s company-wide staffing function, says, “One of the things this [HRP process] maps into is a set of key job openings that we can use to start forecasting and sourcing people in advance.” More specifically, Dell’s Web-based HRP process allows managers to play “what if?” with work force predictions. Kathleen Woodhouse, an HR manager who supports Dell’s preferred accounts division, says, “Managers use our intranet to complete HR functions, like appraisals; our appraisal system also feeds into the financial system so they can play with figures if they need to.”9
1.2 Human Resource Information Systems human resource information system (HRIS) A computerized system for gathering, analyzing, storing, and disseminating information related to the HRM process.
Human resource information systems (HRISs) are computerized systems for gathering, analyzing, storing, and disseminating information related to attracting, developing, and keeping a qualified work force.10 Exhibit 11.3 shows some of the data that are commonly used in HRISs, such as personal and educational data, company employment history, performance appraisal information, work history, and promotions. Human resource information systems can be used for transaction processing, employee self-service, and decision support. For HRISs, transaction processing usually involves employee payroll checks, taxes, and benefit deductions. For example, when STI Knowledge, a technology help desk and call center outsourcing firm, was small, it used different computer spreadsheets to keep track of compensation and benefits for its employees and managers. But now that it has 380
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employees in 12 different locations, it uses an Personal Data Promotion Data HRIS to keep track of compensation and benefits. • Name • Geographic preferences • Address/telephone number • Personal interests This system quickly provides accurate, up-to-date • Employee identification • Awards information about staff compensation in one number • Job preferences complete database and is easy to use; managers • Social Security number • Special skills/knowledge • Medical plan/coverage • Foreign language(s) can access the system via a secure Web browser to • Retirement/investment plan 11 process raises and promotions or other changes. HRISs can also reduce administrative costs by preparing certain routine reports, such as the Work History Educational Data EEOC (Equal Employment Opportunity Commis• Previous employers • High school diploma sion) or OSHA (Occupational Safety and Health • Previous positions • College degrees HRIS • Duties in previous positions • Special courses training Administration) reports that are required of many • Supervisory experience companies. Though typically used to give managers and HR staffers access to human resource data, Performance Appraisal Company Employment History today’s secure Web-based HRISs also give • Date of last performance • Previous job assignments employees immediate, 24-hour self-service access appraisal • Current position to personal data, such as benefits and retirement • Productivity measures • Date of initial employment • Disciplinary action • Seniority date packages. By entering only a user name and a • Tardiness • Salary/pay history password, employees can access and change their • Absenteeism • Current salary/pay medical insurance plan, adjust the mix of invest• Last performance rating • Fringe benefit package • Quality measures • Last pay raise ments in their 401(k) retirement plan, or check on the status of medical or child-care reimbursements. Before STI Knowledge installed its HRIS, benefits workers spent most of Exhibit 11.3 their time manually changing and updating employee benefits packages. Chief Common Data Categories in Human people officer Jennifer Cress said, “There was less time spent interacting with Resource Information Systems employees because the paperwork was overwhelming.”12 But now, with Webbased access, STI’s workers can review or change their benefits plans whenever they want without talking to anyone in human resources. Cress estimates that STI Knowledge’s HRIS has saved $72,900 by reducing the time its HR staff spends on administrative tasks, $144,000 through a 50 percent reduction in the time employees spend looking for their HR data and making HR transactions, and $275,000 through a 25 percent reduction in the time that managers spend on HR issues.13 In addition to gathering and storing information, HRISs also help managers by serving as decision support systems for critical HR decisions.14 In Chapter 17, you will learn that decision support systems (DSS) help managers understand problems and potential solutions by acquiring and analyzing information with sophisticated models and tools. For instance, an HRIS can help managers make HR decisions from the moment job applicants submit résumés to the company. Those résumés are scanned and fed into the HRIS, where they are analyzed for the quality of the writing and for key words that match the organization’s job database. For instance, to identify experienced tax preparers, tax preparation company H&R Block looks for key words like “certified financial planner,” “insurance license,” or competitors’ names.15 Pam Dixon, author of Job Searching Online for Dummies, says that a résumé that’s sent out today is “likely going to be scanned right into a database and searched for certain key words. If those words aren’t in there, it’s rejected.”16 An HRIS can even be used to do preemployment testing or background screening. At Sprint, when job applicants apply at http://careers.sprint.com, they are asked to answer screening questions, such as “Do you know C++ programming?” or “Have you sold to Fortune 500 companies?”17 Sprint’s HRIS then takes the answers and automatically ranks the applicants based on their responses. Recruiters then review the top 25 percent of applicants for job openings. An HRIS can also be used effectively to screen internal applicants on particular qualifications, to match the qualifications of external applicants
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against those of internal applicants, to compare salaries within and between departments, and to review and change employees’ salaries instantaneously without lengthy paperwork. In short, today’s HRISs can help managers make any number of critical human resource decisions.
Review 1: Human Resource Planning Human resource planning (HRP) uses organizational goals and strategies to determine what needs to be done to attract, develop, and keep a qualified work force. Work force forecasts are used to predict the number and kind of workers with specific skills and abilities that an organization needs. Work force forecasts consider both internal and external factors that affect the supply and demand for workers and can be formulated using three kinds of forecasting methods: direct managerial input, best guess, and statistical/historical ratios. Computerized human resource information systems improve HRP by gathering, analyzing, storing, and disseminating information (personal, educational, work history, performance, and promotions) related to human resource management activities. Human resource information systems can be used for transaction processing (payroll checks and routine reports), employee self-service (24-hour Web access allowing instant changes to benefit and retirement packages), and decision support for human resource decisions (analyzing résumés, background screening, and preemployment testing). 2
Since their inception, Hooters restaurants have hired only female servers. Moreover, consistent with the company’s marketing theme, the servers wear short nylon shorts and cutoff T-shirts that show their midriffs. The Equal Employment Opportunity Commission (EEOC) began an investigation of Hooters when a Chicago man filed a gender-based discrimination charge. The man alleged that he had applied for a server’s job at a Hooters restaurant and was rejected because of his gender. The dispute between Hooters and the EEOC quickly gained national attention. One sarcastic letter to the EEOC printed in Fortune magazine read as follows: Dear EEOC: Hi! I just wanted to thank you for investigating those Hooters restaurants, where the waitresses wear those shorty shorts and midriffy T-shirts. I think it’s a great idea that you have decided to make Hooters hire men as—how do you say it?—waitpersons. Gee, I never knew so many men wanted to be waitpersons at Hooters. No reason to let them sue on their own either. You’re right, the government needs to take the lead on this one.18
© LAYNE KENNEDY/ CORBIS
This photo epitomizes what many thought about the EEOC's suit against Hooters. Despite a favorable ruling, Hooters was still required to create more support jobs that would be open to men. A group of men calling themselves "Hooter Guys" dressed like the female employees of the popular restaurant chain as part of their entry in the Boulder Kinetic Sculpture Challenge.
EMPLOYMENT LEGISLATION
This letter characterized public sentiment at the time. Given its backlog of 100,000 job discrimination cases, many wondered if the EEOC didn’t have better things to do with its scarce resources. Three years after the initial complaint, the EEOC ruled that Hooters had violated antidiscrimination laws and offered to settle the case if the company would agree to pay $22 million to the EEOC for distribution to male victims of the “Hooters Girl” hiring policy, establish a scholarship fund to enhance opportunities or education for men, and provide sensitivity training to teach Hooters’ employees how to be more sensitive to men’s needs. Hooters responded with a $1 million publicity campaign, criticizing the EEOC’s investigation. Billboards featuring “Vince,” a male dressed in a Hooters Girl uniform and blond
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wig, sprang up all over the country. Hooters customers were given postcards to send complaints to the EEOC. Of course, Hooters paid the postage. As a result of the publicity campaign, restaurant sales increased by 10 percent. Soon thereafter, the EEOC announced that it would not pursue discriminatory hiring charges against Hooters.19 Nonetheless, the company ended up paying $3.75 million to settle a class-action suit brought by seven men who claimed that their inability to get a job at Hooters violated federal law.20 Under the settlement, Hooters maintained its women-only policy for server jobs, but had to create additional support jobs, such as hosts and bartenders, that would also be open to men. As the Hooters example illustrates, the human resource planning process occurs in a very complicated legal environment. Let’s explore employment legislation by reviewing 2.1 the major federal employment laws that affect human resource practice, 2.2 how the concept of adverse impact is related to employment discrimination, and 2.3 the laws regarding sexual harassment in the workplace.
2.1 Federal Employment Laws Exhibit 11.4 on the next page lists the major federal employment laws and their Web sites, where you can find more detailed information. Except for the Family and Medical Leave Act and the Uniformed Services Employment and Reemployment Rights Act, which are administrated by the Department of Labor (http://www.dol.gov), all of these laws are administered by the EEOC (http://www.eeoc.gov). The general effect of this body of law, which is still evolving through court decisions, is that employers may not discriminate in employment decisions on the basis of gender, age, religion, color, national origin, race, or disability. The intent is to make these factors irrelevant in employment decisions. Stated another way, employment decisions should be based on factors that are “job related,” “reasonably necessary,” or a “business necessity” for successful job performance. The only time that gender, age, religion, and the like can be used to make employment decisions is when they are considered a bona fide occupational qualification.21 Title VII of the 1964 Civil Rights Act says that it is not unlawful to hire and employ someone on the basis of gender, religion, or national origin when there is a bona fide occupational qualification (BFOQ) that is “reasonably necessary to the normal operation of that particular business.” For example, a Baptist church hiring a new minister can reasonably specify that being a Baptist rather than a Catholic or Presbyterian is a BFOQ for the position. However, it’s unlikely that the church could specify race or national origin as a BFOQ. In general, the courts and the EEOC take a hard look when a business claims that gender, age, religion, color, national origin, race, or disability is a BFOQ. For instance, the EEOC disagreed with Hooters’ claim that it was “in the business of providing vicarious sexual recreation” and that “female sexuality is a bona fide occupational qualification.”22 It is important to understand, however that these laws apply to the entire HRM process and not just to selection decisions (i.e., hiring and promotion). Thus, these laws also cover all training and development activities, performance appraisals, terminations, and compensation decisions. Employers who use gender, age, race, or religion to make employment-related decisions when those factors are unrelated to an applicant’s or employee’s ability to perform a job may face charges of discrimination from employee lawsuits or the EEOC. For example, Morgan Stanley, an investment bank, agreed to pay $54 million in damages after the EEOC filed a gender discrimination suit on behalf of 300 of the firm’s female employees. The women were paid less and promoted less often than comparable male employees with whom they worked.23 Boeing, the jet plane manufacturer, paid $72.5 million to settle a similar lawsuit brought by a group of its female employees.24
bona fide occupational qualification (BFOQ) An exception in employment law that permits gender, age, religion, and the like to be used when making employment decisions, but only if they are “reasonably necessary to the normal operation of that particular business.” BFOQs are strictly monitored by the Equal Employment Opportunity Commission.
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• Equal Pay Act of 1963
http://www.eeoc.gov/policy/epa.html
Prohibits unequal pay for males and females doing substantially similar work.
• Civil Rights Act of 1964
http://www.eeoc.gov/policy/vii.html
Prohibits discrimination on the basis of race, color, religion, gender, or national origin.
• Age Discrimination in Employment Act of 1967
http://www.eeoc.gov/policy/adea.html
Prohibits discrimination in employment decisions against persons age 40 and over.
• Pregnancy Discrimination Act of 1978
http://www.eeoc.gov/facts/fs-preg.html
Prohibits discrimination in employment against pregnant women.
• Americans with Disabilities Act of 1990
http://www.eeoc.gov/policy/ada.html
Prohibits discrimination on the basis of physical or mental disabilities.
• Civil Rights Act of 1991
http://www.eeoc.gov/policy/cra91.html
Strengthened the provisions of the Civil Rights Act of 1964 by providing for jury trials and punitive damages.
• Family and Medical Leave Act of 1993
http://www.dol.gov/esa/whd/fmla/ /index.html
Permits workers to take up to 12 weeks of unpaid leave for pregnancy and/or birth of a new child, adoption or foster care of a new child, illness of an immediate family member, or personal medical leave.
• Uniformed Services Employment and Reemployment Rights Act of 1994
http://www.osc.gov/userra.htm
Prohibits discrimination against those serving in the Armed Forces Reserve, the National Guard, or other uniformed services; guarantees that civilian employers will hold and then restore civilian jobs and benefits for those who have completed uniformed service.
Exhibit 11.4 Summary of Major Federal Employment Laws
In addition to the laws presented in Exhibit 11.4, there are two other important sets of federal laws: labor laws and laws and regulations governing safety standards. Labor laws regulate the interaction between management and labor unions that represent groups of employees. These laws guarantee employees the right to form and join unions of their own choosing. For more information about labor laws, see the National Labor Relations Board at http://www. nlrb.gov. The Occupational Safety and Health Act (OSHA) requires that employers provide employees with a workplace that is “free from recognized hazards that are causing or are likely to cause death or serious physical harm.” This law is administered by the Occupational Safety and Health Administration (also referred to as OSHA). OSHA sets safety and health standards for employers and conducts inspections to determine whether those standards are being met. Employers who do not meet OSHA standards may be fined.25 For example, OSHA fined Equilon Enterprises, an oil refinery owned by Royal Dutch Shell and Texaco, $4.4 million after six men died attempting to clean residue from a refinery unit. OSHA determined that the deaths were “entirely preventable” as the men were working in the unit at temperatures that were much too high. When a “flaming mass of hot liquid” unexpectedly spilled out, an explosion resulted, killing all six.26 Investigators concluded that it would have taken 236 days for the unit to cool enough for the work to be done safely.27 For more information about OSHA, see http://www.osha.gov.
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2.2 Adverse Impact and Employment Discrimination The EEOC has investigatory, enforcement, and informational responsibilities. Therefore, it investigates charges of discrimination, enforces the employment discrimination laws in federal court, and publishes guidelines that organizations can use to ensure they are in compliance with the law. One of the most important guidelines jointly issued by the EEOC, the Department of Labor, the U.S. Justice Department, and the federal Office of Personnel Management is the Uniform Guidelines on Employee Selection Procedures, which can be read in their entirety at http://www.access.gpo.gov/nara/cfr/waisidx_02/41cfr603_02.html. These guidelines define two important criteria, disparate treatment and adverse impact, that are used in deciding whether companies have engaged in discriminatory hiring and promotion practices. Disparate treatment, which is intentional discrimination, occurs when people, despite being qualified, are intentionally not given the same hiring, promotion, or membership opportunities as other employees, because of their race, color, age, gender, ethnic group, national origin, or religious beliefs.28 For example, Coca-Cola paid $192.5 million to settle a class-action disparate treatment lawsuit in which it was accused of purposely not giving African American employees equal opportunities in pay, promotions, and performance reviews.29 Likewise, Rent-A-Center paid $12.3 million to settle a classaction disparate treatment lawsuit in which it was accused of not providing fair hiring and promotion opportunities to 4,600 female employees and job applicants.30 Legally, a key element of discrimination lawsuits is establishing motive, meaning that the employer intended to discriminate. If no motive can be established, then a claim of disparate treatment may actually be a case of adverse impact. Adverse impact, which is unintentional discrimination, occurs when members of a particular race, gender, or ethnic group are unintentionally harmed or disadvantaged because they are hired, promoted, or trained (or any other employment decision) at substantially lower rates than others. The courts and federal agencies use the four-fifths (or 80 percent) rule to determine if adverse impact has occurred. Adverse impact occurs if the decision rate for a protected group of people is less than four-fifths (or 80 percent) of the decision rate for a nonprotected group (usually white males). So, if 100 white applicants and 100 black applicants apply for entry-level jobs, and 60 white applicants are hired (60/100 = 60%), but only 20 black applicants are hired (20/100 = 20%), adverse impact has occurred (0.20/0.60 = 0.33). The criterion for the four-fifths rule in this situation is 0.48 (0.60 3 0.80 = 0.48). Since 0.33 is less than 0.48, the four-fifths rule has been violated. Violation of the four-fifths rule is not an automatic indication of discrimination, however. If an employer can demonstrate that a selection procedure or test is valid, meaning that the test accurately predicts job performance or that the test is job related because it assesses applicants on specific tasks actually used in the job, then the organization may continue to use the test. If validity cannot be established, however, then a violation of the four-fifths rule may likely result in a lawsuit brought by employees, job applicants, or the EEOC itself.
2.3 Sexual Harassment According to the EEOC, sexual harassment is a form of discrimination in which unwelcome sexual advances, requests for sexual favors, or other verbal or physical conduct of a sexual nature occurs. From a legal perspective, there are two kinds of sexual harassment, quid pro quo and hostile work environment.31 Quid pro quo sexual harassment occurs when employment outcomes, such as hiring, promotion, or simply keeping one’s job, depend on whether an individual submits to being sexually harassed. For example, in a quid pro quo
disparate treatment Intentional discrimination that occurs when people are purposely not given the same hiring, promotion, or membership opportunities because of their race, color, gender, age, ethnic group, national origin, or religious beliefs.
adverse impact Unintentional discrimination that occurs when members of a particular race, gender, or ethnic group are unintentionally harmed or disadvantaged because they are hired, promoted, or trained (or any other employment decision) at substantially lower rates than others.
four-fifths (or 80 percent) rule A rule of thumb used by the courts and the EEOC to determine whether there is evidence of adverse impact. A violation of this rule occurs when the decision rate for a protected group is less than 80 percent or four-fifths of the decision rate for a nonprotected group.
sexual harassment A form of discrimination in which unwelcome sexual advances, requests for sexual favors, or other verbal or physical conduct of a sexual nature occurs while performing one’s job.
quid pro quo sexual harassment A form of sexual harassment in which employment outcomes, such as hiring, promotion, or simply keeping one’s job, depend on whether an individual submits to sexual harassment.
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hostile work environment A form of sexual harassment in which unwelcome and demeaning sexually related behavior creates an intimidating and offensive work environment.
sexual harassment lawsuit against Costco, a female employee alledged that her boss groped her and bumped into her from behind to simulate sex. “He would tell her: ‘You work with me and I’ll work with you,’ motioning to his private area.”32 The supervisor also allegedly told her that he would fire her if she reported his activities to upper management. By contrast, a hostile work environment occurs when unwelcome and demeaning sexually related behavior creates an intimidating, hostile, and offensive work environment. Salomon Smith Barney, an investment firm, was ordered to pay $3.2 million to a female stockbroker for the hostile work environment she was subjected to in a Los Angeles office. Stockbroker Tameron Keyes alleged that the males with whom she worked “made sex-related insults; arranged for female strippers in the branch office; played pornographic videotapes in the sales manager’s office; engaged in simulated phone sex on the speaker-phone in the office during work hours; and made lewd comments, some threatening and humiliating, directed at her.”33 What common mistakes do managers make when it comes to sexual harassment laws?34 First, many assume that the victim and harasser must be of the opposite sex. According to the courts, they do not. Sexual harassment can also occur between people of the same sex. Second, managers often assume that sexual harassment can occur only between coworkers or between supervisors and subordinates. Not so. Agents of employers, such as consultants, and even nonemployees can be sexual harassers. The key is not employee status but whether the harassment takes place while company business is being conducted. Third, it is often assumed that only people who have themselves been harassed can file complaints or lawsuits. In fact, especially in hostile work environments, anyone affected by offensive conduct can file a complaint or lawsuit. Finally, what should companies do to make sure that sexual harassment laws are followed and not violated?35 First, respond immediately when sexual harassment is reported. A quick response encourages victims of sexual harassment to report problems to management rather than to lawyers or the EEOC. Furthermore, a quick and fair investigation may serve as a deterrent to future harassment. A lawyer for the EEOC said, “Worse than having no sexual harassment policy is a policy that is not followed. It’s merely window dressing. You wind up with destroyed morale when people who come forward are ignored, ridiculed, retaliated against, or nothing happens to the harasser.”36 Next, take the time to write a clear, understandable sexual harassment policy that is strongly worded, gives specific examples of what constitutes sexual harassment, spells outs sanctions and punishments, and is widely publicized within the company. This lets potential harassers and victims know what will not be tolerated and how the firm will deal with harassment should it occur. An example of such a sexual harassment policy can be found on Xtra!. Next, establish clear reporting procedures that indicate how, where, and to whom incidents of sexual harassment can be reported. The best procedures ensure that a complaint will receive a quick response, that impartial parties will handle the complaint, and that the privacy of the accused and accuser will be protected. At DuPont, Avon, and Texas Industries, employees can call a confidential hotline 24 hours a day, 365 days a year.37 Finally, managers should also be aware that most states and many cities or local governments have their own employment-related laws and enforcement agencies. So compliance with federal law is often not enough. In fact, organizations can be in full compliance with federal law and at the same time be violating state or local sexual harassment laws.
Review 2: Employment Legislation Human resource management is subject to the following major federal employment laws: Equal Pay Act, Civil Rights Acts of 1964 and 1991, Age Discrimination in Employment Act, Pregnancy Discrimination Act, Americans
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with Disabilities Act, Family and Medical Leave Act, and Uniformed Services Employment and Reemployment Rights Act. Human resource management is also subject to review by these federal agencies: Equal Employment Opportunity Commission, Department of Labor, Occupational Safety and Health Administration, and National Labor Relations Board. In general, these laws indicate that gender, age, religion, color, national origin, race, disability, and pregnancy may not be considered in employment decisions unless these factors reasonably qualify as BFOQs. Two important criteria, disparate treatment (intentional discrimination) and adverse impact (unintentional discrimination), are used to decide whether companies have wrongly discriminated against someone. While motive is a key part of determining disparate treatment, the courts and federal enforcement agencies use the four-fifths rule to determine if adverse impact has occurred. The two kinds of sexual harassment are quid pro quo and hostile work environment. Managers often wrongly assume that the victim and harasser must be of the opposite sex, that sexual harassment can only occur between coworkers or between supervisors and their employees, and that only people who have themselves been harassed can file complaints or lawsuits. To ensure compliance with sexual harassment laws, companies should respond immediately when harassment is reported; write a clear, understandable sexual harassment policy; establish clear reporting procedures; and be aware of and follow city and state laws concerning sexual harassment.
Finding Qualified Workers Ironically, despite record sales, Technical Materials, which sells electroplating and metal-bonding processes to car manufacturers and high-tech industries, could not find enough qualified employees to work in its factories. Its pool of prospective employees was so weak that one in six applicants failed its drug test up, from one in twenty-five. Company president Al Lubrano made numerous strong job offers, added more pay and benefits to those offers when applicants asked for more, and still couldn’t hire anybody. Finally, Lubrano said, “When it got ridiculous, we walked away.”38 Likewise, the nursing shortage mentioned at the beginning of the chapter is why Mary Viney, director of patient care services, found herself in Manila, trying to encourage Filipino nurses to work for her hospital in Austin, Texas. In Texas, says Viney, “it’s a day-to-day, shift-toshift challenge to get enough nurses.”39 As these examples illustrate, finding qualified workers can be an increasingly difficult task. Finding qualified applicants is just the first step, however. Deciding which applicants to hire is the second. CEO John Chambers of Cisco Systems, the leading designer and manufacturer of the high-tech equipment that serves as the backbone of the Internet, says, “Cisco has an overall goal of getting the top 10 to 15 percent of people in our industry. Our philosophy is very simple—if you get the best people in the industry to fit into your culture and you motivate them properly, then you’re going to be an industry leader.”40 3 4
3
After reading the next two sections, you should be able to explain how companies use recruiting to find qualified job applicants. describe the selection techniques and procedures that companies use when deciding which applicants should receive job offers.
RECRUITING
Recruiting is the process of developing a pool of qualified job applicants. Let’s examine 3.1 what job analysis is and how it is used in recruiting and 3.2 how companies use internal recruiting and 3.3 external recruiting to find qualified job applicants.
recruiting The process of developing a pool of qualified job applicants.
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3.1 Job Analysis and Recruiting job analysis
Job analysis is a “purposeful, systematic process for collecting information on
A purposeful, systematic process for collecting information on the important work-related aspects of a job.
the important work-related aspects of a job.”41 Typically, a job analysis collects four kinds of information: •
work activities, such as what workers do and how, when, and why they do it; • the tools and equipment used to do the job; • the context in which the job is performed, such as the actual working conditions or schedule; and • the personnel requirements for performing the job, meaning the knowledge, skills, and abilities needed to do a job well.42
job description A written description of the basic tasks, duties, and responsibilities required of an employee holding a particular job.
job specifications A written summary of the qualifications needed to successfully perform a particular job.
Exhibit 11.5 Job Description and Job Specifications for a Helicopter Pilot for the City of Little Rock, Arkansas
Job analysis information can be collected by having job incumbents and/or supervisors complete questionnaires about their jobs, by direct observation, by interviews, or by filming employees as they perform their jobs. Job descriptions and job specifications are two of the most important results of a job analysis. A job description is a written description of the basic tasks, duties, and responsibilities required of an employee holding a particular job. Job specifications, which are often included as a separate section of a job description, are a summary of the qualifications needed to successfully perform the job. Exhibit 11.5 shows a job description and the job specifications for a helicopter pilot for the city of Little Rock, Arkansas. Because a job analysis clearly specifies what a job entails, as well as the knowledge, skills, and abilities that are needed to do the job well, companies must complete a job analysis before beginning to recruit job applicants. Exhibit 11.6 shows that job analysis, job descriptions, and job specifications are the foundation on which all critical human resource activities are built. They are used during recruiting and selection to match applicant qualifications with the requirements of the job. They are used throughout the staffing process to ensure that selection devices and the decisions based on these
DESCRIPTION FOR HELICOPTER PILOT
To provide assistance for air searches, river rescues, high-rise building rescues, and other assignments, by providing air survey and aviation response. Pilots a rotary-wing aircraft, serving as pilot or co-pilot, to assist in air searches, river rescues, high-rise building rescues, and other assignments. Ensures that aircraft is properly outfitted for each assignment (equipment, rigging tools, supplies, etc.). Performs preflight inspection of aircraft; checks rotors, fuel, lubricants, controls, etc. Prepares written reports on assignments; maintains flight logs. Obtains weather reports; determines to proceed with assignments given forecasted weather conditions. Operates a radio to maintain contact with and to report information to airport personnel and police department personnel. JOB SPECIFICATIONS FOR HELICOPTER PILOT
Must possess a valid Commercial Pilot’s License for rotary-wing aircraft before employment and maintain licensure for the duration of employment in this position. Must have considerable knowledge of Federal Aviation Administration (FAA) laws and regulations, rotary-wing aircraft operating procedures, air traffic safety, flying procedures and navigational techniques, and FAA and police radio operation and procedures. Must have some knowledge of preventive maintenance methods, repair practices, safety requirements and inspection procedures. Must have skill in the operation of a rotary-wing aircraft, radio equipment, the ability to conduct safety inspections of aircraft, to maintain aircraft maintenance logs and prepare reports, to detect and identify aircraft malfunction symptoms, to detect and recognize ground conditions and characteristics (i.e., utility line breaks, river currents, etc.), to read maps and air navigation charts, and to communicate effectively, both orally and in writing. Must have completed high school; at least one-thousand hours of flight time experience in piloting rotary-wing aircraft; OR any equivalent combination of experience and training which provides the required knowledge, skills, and abilities. Source: “Job Description: Helicopter Pilot,” City of Little Rock, Arkansas, [Online] available at http://www.accesslittlerock.org/HumanResources/h000274.htm, 31 May 2003.
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devices are job related. For example, the questions asked in an interview should be based on the most important work activities identified by a job analysis. Likewise, during performance appraisals, employees should be evaluated in areas that a job analysis has identified as the most important in a job. Job analyses, job descriptions, and job specifications also help companies meet the legal requirement that their human resource decisions be job related. To be judged job related, recruitment, selection, training, performance appraisals, and employee separations must be valid and be directly related to the important aspects of the job, as identified by a careful job analysis. In fact, in Griggs v. Duke Power Co. and Albemarle Paper Co. v. Moody, the U.S. Supreme Court ruled that companies should use job analyses to help establish the job relatedness of their human resource procedures.43 The EEOC’s Uniform Guidelines on Employee Selection Procedures also recommend that companies base their human resource procedures on job analysis.
HR Decisions Recruiting Selection Training Performance Appraisal Separation
3.2 Internal Recruiting Internal recruiting is the process of developing a pool of qualified job applicants
CREATED BY HAEWON KYE & EDWARD SUSSMAN, © INC.COM
from people who already work in the company. Internal recruiting, sometimes called “promotion from within,” improves employee commitment, morale, and motivation. Recruiting current employees also reduces recruitment startup time and costs, and because employees are already familiar with the company’s culture and procedures, they are more likely to succeed in new jobs. This is why, according to Bob Graczyk, director of human resources, that Quick Chek Food Stores’ goal is to hire “100 percent” of its new store managers through internal recruiting. Graczyk said, “We try to find people whose personal values align with the company values.”44 And, of course, it’s easier to do that when the applicants already work for the company. Job posting and career paths are two methods of internal recruiting. Job posting is a procedure for advertising job openings within the company to existing employees. A job description and requirements are typically posted on a bulletin board, in a company newsletter, or in an internal computerized job bank that is accessible only to employees. For example, under Japan-based Fujisawa Pharmaceuticals’ “Job Challenge” policy, all Fujisawa departments and divisions recruit internally by posting job openings to the company’s intranet for all employees to see.45 Job posting helps organizations discover hidden talent, allows employees to take responsibility for career planning, and makes it easier for companies to retain talented workers who are dissatisfied in their current jobs and would otherwise leave the company.46 Fujisawa Pharmaceuticals also has a “Free Agent” policy, which encourages employees who want to change jobs to post their résumés to the same intranet. So, when Fujisawa’s departments and divisions have openings, the first place they look to fill the positions is the company intranet.47
HR Subsystems •
Job Description
• Job
Specification
Job Analysis
Exhibit 11.6 Importance of Job Analysis to Human Resource Management Knowing what type of employee you need and finding an exact fit generally takes time and effort. And in the world of Internet applications and job searches, companies are often flooded with applicants for each posted opening. Inc. is one of many business publications that also offers a job posting service to help managers narrow the field.
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internal recruiting The process of developing a pool of qualified job applicants from people who already work in the company.
A career path is a planned sequence of jobs through which employees may advance within an organization. For example, a person who starts as a sales representative may move up to sales manager and then to district or regional sales manager. Career paths help employees focus on long-term goals and development while also helping companies do succession or replacement planning. For instance, one of the disadvantages of internal recruitment is that it sets off a domino effect of job changes. When an internal employee changes jobs within a company, this person fills one job opening but automatically creates another. With career paths, the company can quickly identify possible replacements as job openings ricochet through the organization. Coca-Cola avoids this problem by making sure that all of its managers are developing replacements at least two levels below their current position. Ian Pinto, senior HR manager for Coca-Cola of India, says, “This enables us to cut the costs associated with scrambling for replacements when people leave, or are moved up or sideways.”48
3.3 External Recruiting external recruiting
External recruiting is the process of developing a pool of qualified job applicants
The process of developing a pool of qualified job applicants from outside the company.
from outside the company. For example, as part of its strategic plan for longterm success, Electronic Arts, the maker of top-selling video games such as “Madden NFL,” has put together a “top 40” list of the most talented managers (senior executives, game directors, producers, etc.) in the industry that it hopes to eventually recruit to the company.49 José Martin, who is head of human resources for EA’s 13 game production studios, says, “The challenge for companies now is not identifying talented people but persuading those people to join your company.”50 External recruitment methods include advertising (newspapers, magazines, direct mail, radio, or television), employee referrals (asking current employees to recommend possible job applicants), walk-ins (people who apply on their own), outside organizations (universities, technical/trade schools, professional societies), employment services (state or private employment agencies, temporary help agencies, and professional search firms), special events (career conferences or job fairs), and Internet job sites. Which external recruiting method should you use? Studies show that employee referrals, walk-ins, newspaper advertisements, and state employment agencies tend to be used most frequently for office/clerical and production/service employees. By contrast, newspaper advertisements and college/university recruiting are used most frequently for professional/technical employees. When recruiting managers, organizations tend to rely most heavily on newspaper advertisements, employee referrals, and search firms.51 In the last few years, the biggest changes in external recruiting has been the increased use of the Internet. Some companies now recruit applicants through Internet job sites, such as Monster.com, HotJobs.com, Hire.com, and CareerBuilder.com. Companies can post job openings for 30 days on one of these sites for about half of the cost of running an advertisement just once in a Sunday newspaper. Plus, Internet job listings generate nine times as many résumés as one ad in the Sunday newspaper.52 And because these sites attract so many applicants and offer so many services, companies save by finding qualified applicants without having to use more expensive recruitment and search firms, which typically charge one-third of a new hire’s salary.53 Monica Albano, executive vice president of human resources for the Americas at Reuters, the news and information company, says, “Utilizing Hire.com, we’re able to attract the best available talent, be specific about the data we retain on people and utilize that data as openings become available. Overall, we saved in excess of $1.5 million worldwide.”54 Despite their many benefits, job Web sites have a significant drawback: companies may receive hundreds, if not thousands, of applications from
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unqualified applicants. The sheer volume increases the importance of proper screening and selection. For example, when IM Logic, which makes instant messaging software, advertised job openings on Monster.com and CareerBuilder.com, the company was flooded with 200 résumés the first hour the jobs were posted and nearly 750 résumés within two days. CEO Francis DiSouza said, “We weren’t ready for that.”55 Therefore, assuming that the most qualified applicants will learn something about the company before applying, many organizations now advertise job openings directly on their Web sites. For example, Subway, the submarine sandwich restaurant chain, accepts applications for part-time work at its 23,375 restaurants in 81 countries at its Web site (http://www.subway.com/applications/ InStoreJobs/index.aspx).56 In fact, 60 percent of the people hired via the Internet have applied at a company Web site. By contrast, only 21 percent of Internet hires come from industry sites, such as Dice.com and Techies.com for technology jobs, while 14 percent were hired through Monster.com, 5.7 percent via CareerBuilder.com, and 1.9 percent via HotJobs.com.57 Today, between 82 percent and 92 percent of companies use the Internet to fill job openings. In fact, Internet recruiting is now second to newspaper advertising in terms of the number of applicants it generates.58 And, with the addition of a new “.jobs” Internet suffix (for example, www.dell.jobs for jobs at Dell, Inc.), more and more companies will use their Web sites to attract, recruit, and screen job applicants.59
Review 3: Recruiting Recruiting is the process of finding qualified job applicants. The first step in recruiting is to conduct a job analysis to collect information about the important work-related aspects of the job. The job analysis is then used to write a job description of basic tasks, duties, and responsibilities and to write job specifications indicating the knowledge, skills, and abilities needed to perform the job. Job analyses, descriptions, and specifications help companies meet the legal requirement that their human resource decisions be job related. Internal recruiting, or finding qualified job applicants from inside the company, can be done through job posting and career paths. External recruiting, or finding qualified job applicants from outside the company, is done through advertising, employee referrals, walk-ins, outside organizations, employment services, special events, and Internet job sites. The Internet is a particularly promising method of external recruiting because of its low cost, wide reach, and ability to communicate and receive unlimited information. 4
SELECTION
Once the recruitment process has produced a pool of qualified applicants, the selection process is used to determine which applicants have the best chance of performing well on the job. When the East Providence, Rhode Island Police Department has job openings, it follows a “rule of three,” meaning that no matter how many candidates it has for an opening, it looks at only the top three applicants, as determined by a standardized written test. Those top three applicants for every position must then pass a physical fitness test and a background check. Every applicant who makes it that far is then put on a list of official candidates for police jobs for two years. Only the best candidates on that list participate in group interviews with the city manager, police chief, deputy chief, a police captain, and the department’s personnel director and affirmative action officer, each of whom privately ranks the candidates after each interview. Applicants with the highest rankings from the group interviews are offered positions in the Police Academy. The remaining applicants from the group interviews may be considered two more times before being rejected.60
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selection The process of gathering information about job applicants to decide who should be offered a job.
validation The process of determining how well a selection test or procedure predicts future job performance. The better or more accurate the prediction of future job performance, the more valid a test is said to be.
As this example illustrates, selection is the process of gathering information about job applicants to decide who should be offered a job. To make sure that selection decisions are accurate and legally defendable, the Uniform Guidelines on Employee Selection Procedures recommend that all selection procedures be validated. Validation is the process of determining how well a selection test or procedure predicts future job performance. The better or more accurate the prediction of future job performance, the more valid a test is said to be. See the “What Really Works” feature later in this chapter for more on the validity of common selection tests and procedures. Let’s examine common selection procedures, such as 4.1 application forms and résumés, 4.2 references and background checks, 4.3 selection tests, and 4.4 interviews.
D
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THE RIGHT TH I
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4.1 Application Forms and Résumés The first selection devices that most job applicants encounter when they seek a job are application forms and résumés. Both contain similar information about an applicant, such as name, address, job and educational history, and so forth. Though an organization’s application form often asks for information already provided by the applicant’s résumé, most organizations prefer to collect this information in their own format for entry into a human resource information system. Employment laws apply to application forms, just as they do to all selection devices. Application forms may ask applicants for only valid, job-related information. Nonetheless, application forms commonly ask applicants for non-jobrelated information, such as marital status, maiden name, age, or date of high school graduation. Indeed, one study found that 73 percent of organizations had application forms that violated at least one federal or state law.61 Exhibit 11.7 lists the kinds of information that companies may not request in application forms, during job interviews, or in any other part of the selection process. As attorney Tiberio Trimmer says, “Your objective is to hire someone qualified to perform the requireDON’T EMBELLISH YOUR RÉSUMÉ ments of the job. Not asking things that are peripheral to the Your résumé is supposed to help you get work itself helps you to stay on the right side of the law.”62 the interview that can get you a job. So where do you draw the line between makCompanies should also be aware that employment laws in ing yourself look attractive to a potential other countries may differ from U.S. laws. For instance, in employer and lying? Despite the strong France, employers may ask applicants for non-job-related pertemptation to improve your odds of getsonal information such as their age or the number of children. ting a job, embellishing your résumé is And most French employers expect applicants to include a wrong. Moreover, the information on your picture with their curriculum vitae (i.e., résumé).63 Conserésumé is legally binding. If you misrepquently, companies should closely examine their application resent information or lie on your résumé, forms, interview questions, and other selection procedures for and many do, you’re breaking the law and compliance with the law wherever they do business. can be fired. But where should you draw Résumés also pose problems for companies, but in a the line? In general, if what you put on different way. Studies show that as many as one-third of job your résumé feels wrong, don’t do it. More specifically, don’t embellish job tiapplicants intentionally falsify some information on their tles, responsibilities, employment dates, résumés and that 80 percent of the information on résumés college degrees, certifications, general may be misleading. A study of 200,000 job applicants found qualifications, or previous experience in that 20 percent listed college degrees they hadn’t earned, 30 any way. Do the right thing: Tell the truth percent changed the dates of their employment, 40 percent on your résumé.64 reported much higher salaries, 30 percent incorrectly described their previous jobs, 27 percent falsified their references, and 25 percent reported working at nonexistent or no longer existing companies, so the fact that they never worked there couldn’t be discovered.65 Therefore, managers should verify the information collected via résumés and application forms by comparing it with additional information collected during interviews and other stages of the selection process, such as references and background checks, which are discussed next.
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1. Children. Don’t ask applicants if they have children, plan to have them, or have or need child care. Questions about children can unintentionally single out women. 2. Age. Because of the Age Discrimination in Employment Act, employers cannot ask job applicants their age during the hiring process. Since most people graduate high school at the age of 18, even asking for high school graduation dates could violate the law. 3. Disabilities. Don’t ask if applicants have physical or mental disabilities. According to the Americans with Disabilities Act, disabilities (and reasonable accommodations for them) cannot be discussed until a job offer has been made. 4. Physical characteristics. Don’t ask for information about height, weight, or other physical characteristics. Questions about weight could be construed as leading to discrimination toward overweight people, who studies show are less likely to be hired in general. 5. Name. Yes, you can ask an applicant’s name, but you cannot ask a female applicant for her maiden name because it indicates marital status. Asking for a maiden name could also lead to charges that the organization was trying to establish a candidate’s ethnic background. 6. Citizenship. Asking applicants about citizenship could lead to claims of discrimination on the basis of national origin. However, according to the Immigration Reform and Control Act, companies may ask applicants if they have a legal right to work in the United States. 7. Lawsuits. Applicants may not be asked if they have ever filed a lawsuit against an employer. Federal and state laws prevent this to protect whistleblowers from retaliation by future employers. 8. Arrest records. Applicants cannot be asked about their arrest records. Arrests don’t have legal standing. However, applicants can be asked whether they have been convicted of a crime. 9. Smoking. Applicants cannot be asked if they smoke. Smokers might be able to claim that they weren’t hired because of fears of higher absenteeism and medical costs. However, they can be asked if they are aware of company policies that restrict smoking at work. 10. AIDS/HIV. Applicants can’t be asked about AIDS, HIV, or any other medical condition. Questions of this nature would violate the Americans with Disabilities Act, as well as federal and state civil rights laws. Source: J.S. Pouliot, “Topics to Avoid with Applicants,” Nation’s Business 80, no. 7 (1992): 57.
4.2 References and Background Checks Nearly all companies ask an applicant to provide employment references, such as previous employers or coworkers, that they can contact to learn more about the candidate. Background checks are used to verify the truthfulness and accuracy of information that applicants provide about themselves and to uncover negative, job-related background information not provided by applicants. Background checks are conducted by contacting “educational institutions, prior employers, court records, police and governmental agencies, and other informational sources, either by telephone, mail, remote computer access, or through inperson investigations.”66 Unfortunately, previous employers are increasingly reluctant to provide references or background check information for fear of being sued by previous employees for defamation. If former employers provide potential employers with unsubstantiated information that damages applicants’ chances of being hired, applicants can (and do) sue for defamation. As a result, 54 percent of employers will not provide information about previous employees.67 Many provide only dates of employment, positions held, and date of separation. When previous employers decline to provide meaningful references or background information, they put other employers at risk of negligent hiring lawsuits, in which an employer is held liable for the actions of an employee who would not have been hired if the employer had conducted a thorough reference search and background check. In Florida, the Tallahassee Furniture Company hired a worker to make home furniture deliveries but did not conduct a background check or even ask him to complete an application form. After being hired, he attacked a woman in her home with a knife. When she sued the company, it discovered that he had a histroy of drug use, violent assault, and mental illness. The courts awarded the woman $2.5 million in damages.68
Exhibit 11.7 Topics That Employers Should Avoid in Application Forms, Interviews, or Other Parts of the Selection Process
employment references Sources such as previous employers or coworkers who can provide job-related information about job candidates.
background checks Procedures used to verify the truthfulness and accuracy of information that applicants provide about themselves and to uncover negative, job-related background information not provided by applicants.
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With previous employers generally unwilling to give full, candid references and with negligent hiring lawsuits awaiting companies that don’t get such references and background information, what can companies do? Conduct criminal record checks, especially if the job for which the person is applying involves money, drugs, control over valuable goods, or access to the elderly, people with disabilities, or people’s homes.69 According to the Society for Human Resource Management, 80 percent of companies now conduct criminal record checks.70 Next, dig deeper for more information. Ask references to provide references. Voca Corporation, based in Columbus, Ohio, has 2,500 employees in six states who care for people with mental retardation and developmental disabilities. Hilary Franklin, director of human resources, says she not only checks references, but also asks the references to provide references and then asks those references for still others. She says, “As you get two or three times removed, you get more detailed, honest information.”71 Next, ask applicants to sign a waiver that permits you to check references, run a background check, or contact anyone else with knowledge of their work performance or history. Likewise, ask applicants if there is anything they would like the company to know or if they expect you to hear anything “unusual” when contacting references.72 This, in itself, is often enough to get applicants to share information that they typically withhold. When you’ve finished checking, keep the findings confidential to minimize the chances of a defamation charge. Always document all reference and background checks, noting who was called and what information was obtained. And to reduce the likelihood that negligent hiring lawsuits will succeed, it’s particularly important to document which companies and people refused to share reference check and background information. Finally, consider hiring private investigators to conduct background checks. They can often uncover surprising information not revealed by traditional background checks. When an American investment company was looking for a Japanese manager to run its Tokyo office, it quickly found a strong applicant who claimed to have experience with dozens of initial public offerings, or IPOs (the process of bringing privately held companies public so that shares of company stock can be sold in financial markets). In multiple interviews, this applicant clearly had detailed information about each IPO deal. However, a background check soon revealed that he was the Japanese translator and not the financier behind each deal.73
4.3 Selection Tests
specific ability tests (aptitude tests) Tests that measure the extent to which an applicant possesses the particular kind of ability needed to do a job well.
We’re all aware that some people do well in jobs while other people do poorly, but how do you determine into which category an applicant falls? Selection tests give organizational decision makers a chance to know who will likely do well in a job and who won’t. The basic idea behind selection testing is to have applicants take a test that measures something directly or indirectly related to doing well on the job. The selection tests discussed here are specific ability tests, cognitive ability tests, biographical data, personality tests, work sample tests, and assessment centers. Specific ability tests measure the extent to which an applicant possesses the particular kind of ability needed to do a job well. Specific ability tests are also called aptitude tests because they measure aptitude for doing a particular task well. For example, if you took the SAT to get into college, then you’ve taken the aptly named Scholastic Aptitude Test, which is one of the best predictors of how well students will do in college (i.e., scholastic performance). Specific ability tests also exist for mechanical, clerical, sales, and physical work. For example, clerical workers have to be good at accurately reading and scanning numbers as they type or enter data. Exhibit 11.8 shows items similar to the Minnesota
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HE R IGHT T G T H I IN NG DO
Clerical Test; applicants have only a short time to determine NUMBERS/LETTERS SAME if the two columns of numbers and letters are identical. 1. 3468251 3467251 Yes No Applicants who are good at this are likely to do well as cleri2. 4681371 4681371 Yes No cal or data-entry workers. Cognitive ability tests measure the extent to which appli3. 7218510 7218520 Yes No cants have abilities in perceptual speed, verbal comprehen4. ZXYAZAB ZXYAZAB Yes No sion, numerical aptitude, general reasoning, and spatial 5. ALZYXMN ALZYXNM Yes No aptitude. In other words, these tests indicate how quickly 6. PRQZYMN PRQZYMN Yes No and how well people understand words, numbers, logic, and spatial dimensions. Whereas specific ability tests predict job Source: N. W. Schmitt & R. J. Klimoski, Research Methods in Human Resource performance in only particular types of jobs, cognitive abil- Management (Mason, OH: South-Western, 1991). Used with permission. ity tests accurately predict job performance in almost all 11.8 kinds of jobs.74 Why is this so? The reason is that people with strong cognitive Exhibit Clerical Test Items Similar to Those or mental abilities are usually good at learning new things, processing complex Found on the Minnesota Clerical Test information, solving problems, and making decisions, and these abilities are important in almost all jobs.75 In fact, cognitive ability tests are almost always cognitive ability tests the best predictors of job performance. Consequently, if you were allowed to Tests that measure the extent to which use just one selection test, cognitive ability tests would be the one to use.76 (In applicants have abilities in perceptual practice, though, companies use a battery of different tests because doing so speed, verbal comprehension, numerical aptitude, general reasoning, and leads to much more accurate selection decisions.) spatial aptitude. Biographical data, or biodata, are extensive surveys that ask applicants ques- biographical data (biodata) tions about their personal backgrounds and life experiences. The basic idea Extensive surveys that ask applicants behind biodata is that past behavior (personal background and life experience) questions about their personal backis the best predictor of future behavior. For example, during World War II, the grounds and life experiences. U.S. Air Force had to quickly test tens of thousands of men without flying experience to determine who was likely to be a good pilot. Since flight training took several months and was DON’T USE PSYCHICS, LIE DETECTORS, OR very expensive, selecting the right people for training was HANDWRITING ANALYSIS TO MAKE HR important. After examining extensive biodata, it found that one DECISIONS of the best predictors of success in flight school was whether The Coronado Bay Resort in San Diego hired students had ever built model airplanes that actually flew. This a psychic to work with its 18-member manone biodata item was almost as good a predictor as the entire agement team as a way of “moving the manset of selection tests that the Air Force was using at the time.77 agers to the next step.” Seventy-five percent of the organizations in France and SwitzerMost biodata questionnaires have over 100 items that land use handwriting analysis for hiring and gather information about habits and attitudes, health, interpromotion decisions. In the past, employers personal relations, money, what it was like growing up in your in the United States regularly used polyfamily (parents, siblings, childhood years, teen years), personal graphs (lie detectors) for preemployment habits, current home (spouse, children), hobbies, education screening. What do these methods have in 78 and training, values, preferences, and work. In general, biocommon? Companies use them, but they data are very good predictors of future job performance, espedon’t work. For example, there is no sciencially in entry-level jobs. tific evidence that handwriting analysis You may have noticed that some of the information works, yet managers continue to use it. Lie requested in biodata surveys also appears in Exhibit 11.7 as detectors are no more accurate than a coin topics employers should avoid in applications, interviews, or flip in screening out unethical employees. Fortunately, the Employee Polygraph Protecother parts of the selection process. This information can be tion Act now prevents organizations from usrequested in biodata questionnaires provided that the coming polygraphs for hiring and promotion depany can demonstrate that the information is job related (i.e., cisions. As for psychics at work, well, enough valid) and does not result in adverse impact against protected said. So, when you’re hiring and promoting groups of job applicants. Biodata surveys should be validated people, do the right thing. Stay away from and tested for adverse impact before they are used to make fads. Use the reliable, valid, scientifically 79 selection decisions. proven selection and assessment procedures Personality is the relatively stable set of behaviors, discussed here to hire the right workers and attitudes, and emotions displayed over time that makes people promote the right people into managedifferent from each other. Personality tests measure the extent ment.80 to which applicants possess different kinds of job-related personality dimensions. In Chapter 12, you will learn that there
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personality tests Tests that measure the extent to which applicants possess different kinds of job-related personality dimensions.
work sample tests Tests that require applicants to perform tasks that are actually done on the job.
assessment centers A series of managerial simulations, graded by trained observers, that are used to determine applicants’ capability for managerial work.
are five major personality dimensions (the Big Five)—extraversion, emotional stability, agreeableness, conscientiousness, and openness to experience—related to work behavior.81 Of these, only conscientiousness, the degree to which someone is organized, hardworking, responsible, persevering, thorough, and achievement oriented, predicts job performance across a wide variety of jobs.82 Conscientiousness works especially well in combination with cognitive ability tests, allowing companies to select applicants who are organized, hardworking, responsible, and smart! Work sample tests, also called performance tests, require applicants to perform tasks that are actually done on the job. So, unlike specific ability, cognitive ability, biographical data, and personality tests, which are indirect predictors of job performance, work sample tests directly measure job applicants’ capability to do the job. For example, a computer-based work sample test has applicants assume the role of a real estate agent who must decide how to interact with “virtual clients” in a gamelike scenario. And, as in real life, the clients can be frustrating, confusing, demanding, or indecisive. In one situation, the wife loves the “house” but the husband hates it. The applicants, just like actual real estate agents, must demonstrate what they would do in these realistic situations.83 This work sample simulation gives real estate companies direct evidence of whether applicants can do the job if they are hired. Work sample tests are generally very good at predicting future job performance; however, they can be expensive to administer and can be used for only one kind of job. For example, an auto dealership could not use a work sample test for mechanics as a selection test for sales representatives. Assessment centers use a series of job-specific simulations that are graded by multiple trained observers to determine applicants’ ability to perform managerial work. Unlike the previously described selection tests that are commonly used for specific jobs or entry-level jobs, assessment centers are most often used to select applicants who have high potential to be good managers. Assessment centers often last two to five days and require participants to complete a number of tests and exercises that simulate managerial work. Some of the more common assessment center exercises are in-basket exercises, role-plays, small-group presentations, and leaderless group discussions. An in-basket exercise is a paper-and-pencil test in which an applicant is given a manager’s “in-basket” containing memos, phone messages, organizational policies, and other communications normally received by and available to managers. Applicants have a limited time to read through the in-basket, prioritize the items, and decide how to deal with each item. Experienced managers then score the applicants’ decisions and recommendations. Exhibit 11.9 shows an item that could be used in an assessment center for evaluating applicants for a job as a store manager. In a leaderless group discussion, another common assessment center exercise, a group of six applicants is given approximately two hours to solve a problem, but no one is put in charge (hence the name “leaderless” group discussion). Trained observers watch and score each participant on the extent to which he or she facilitates discussion, listens, leads, persuades, and works well with others. Are tests perfect predictors of job performance? No, they aren’t. Some people who do well on selection tests will do poorly in their jobs. Likewise, some people who do poorly on selection tests (and therefore weren’t hired) would have been very good performers. Nonetheless, valid tests will minimize these selection errors (hiring people who should not have been hired, and not hiring people who should have been hired) while maximizing correct selection decisions (hiring people who should have been hired, and not hiring people who should not have been hired). In short, tests increase the chances that you’ll hire the right person for the job, that is, someone who turns out to be a good
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performer. So, although tests aren’t perfect, almost nothing predicts future job performance as well as the selection tests discussed here. For more on how well selection tests increase the odds of hiring the right person for the job, see the “What Really Works” feature on page 358.
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February 28 Sam & Dave's Discount Warehouse Orange, California
Dear Store Manager,
Last week, my children and I were shopping in your store. After doing our grocery shopping, we stopped in the electronics department and asked the clerk, whose name is Donald Block, to help us find a copy of the latest version of the Madden NFL video game. Mr. Block was rude, unhelpful, and told us to find it for ourselves as he was busy.
Sharon Ball, director of recruiting and administration for Epitec Group, has interviewed all kinds of mistake-prone job candidates: one with food on his sweater, another with bad breath I've been a loyal customer for over six years and expect that “smelled like bile,” one who stank of mariyou to immediately do something about Mr. Block's behavior. If you don't, I'll start doing my shopping juana, and one who stopped the interview to somewhere else. talk on his cell phone for five minutes. Only the applicant with bad breath was hired. She said, Sincerely, “Nice guy. We had to pump him full of Tic Margaret Quinlan Tacs.”84 In interviews, company representatives ask job applicants job-related questions to determine whether they are qualified for the job. Source: Adapted from N. W. Schmitt & R. J. Klimoski, Research Methods in Human Resource ManInterviews are probably the most frequently agement (Mason, OH: South-Western 1991). used and relied on selection device. There are Exhibit 11.9 several basic kinds of interviews: unstructured, structured, and semistructured. In-Basket Item for an Assessment In unstructured interviews, interviewers are free to ask applicants anything they Center for Store Managers want, and studies show that they do. Because interviewers often disagree about which questions should be asked during interviews, different interviewers tend interviews to ask applicants very different questions.85 Furthermore, individual interviewers A selection tool in which company representatives ask job applicants jobeven seem to have a tough time asking the same questions from one interview to related questions to determine the next. This high level of inconsistency lowers the validity of unstructured whether they are qualified for the job. interviews as a selection device because comparing applicant responses can be difficult. As a result, unstructured interviews are about half as accurate as struc- unstructured interviews tured interviews at predicting which job applicants should be hired. Interviews in which interviewers are By contrast, with structured interviews, standardized interview questions are free to ask applicants anything they prepared ahead of time so that all applicants are asked the same job-related want. questions. Four kinds of questions are typically asked in structured interviews: structured interviews
• • • •
situational questions, which ask applicants how they would respond in a hypothetical situation (e.g., “What would you do if . . . ?”). behavioral questions, which ask applicants what they did in previous jobs that were similar to the job for which they are applying (e.g., “In your previous jobs, tell me about . . . ”). background questions, which ask applicants about their work experience, education, and other qualifications (e.g., “Tell me about the training you received at . . . ”). job-knowledge questions, which ask applicants to demonstrate their job knowledge (e.g., for nurses, “Give me an example of a time when one of your patients had a severe reaction to a medication. How did you handle it?”).86
The primary advantage of structured interviews is that comparing applicants is much easier because they are all asked the same questions. Structuring interviews also ensures that interviewers ask only for important, job-related information. Not only are the accuracy, usefulness, and validity of the interview improved, but the chances that interviewers will ask questions about topics that violate employment laws (go back to Exhibit 11.7 for a list of these topics) are reduced.
Interviews in which all applicants are asked the same set of standardized questions, usually including situational, behavioral, background, and job-knowledge questions.
W H A T
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Using Selection Tests to Hire Good Workers Hiring new employees is always something of a gamble. When you say, “We’d like to offer you a job,” you never know how it’s going to turn out. Nonetheless, the selection tests discussed in this chapter and reviewed in this section can go a long way toward taking the gambling aspect out of the hiring process. Indeed, more than 1,000 studies based on over 100,000 study participants strongly indicate that selection tests can give employers a much better than average (50-50) chance of hiring the right workers. In fact, if you had odds like these working for you in Las Vegas, you’d make so much money the casinos wouldn’t let you in the door. COGNITIVE ABILITY TESTS
There is a 76 percent chance that applicants who do well on cognitive ability tests will be much better performers in their jobs than applicants who do not do well on such tests.
STRUCTURED INTERVIEWS
There is a 76 percent chance that applicants who do well in structured interviews will be much better performers in their jobs than applicants who do not do well in such interviews. Probability of Success 10%
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When deciding who to hire, most companies use a number of tests to make even more accurate selection decisions. There is an 82 percent chance that applicants who do well on a combination of cognitive ability tests and work sample tests will be much better performers in their jobs than applicants who do not do well on both tests. Probability of Success
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There is a 77 percent chance that applicants who do well on work sample tests will be much better performers in their jobs than applicants who do not do well on such tests.
There is an 83 percent chance that applicants who do well on a combination of cognitive ability tests and integrity tests (see Chapter 4 for a discussion of integrity tests) will be much better performers in their jobs than applicants who do not do well on both tests.
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There is an 82 percent chance that applicants who do well on a combination of cognitive ability tests and structured interviews will be much better performers in their jobs than applicants who do not do well on both tests.87
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Semistructured interviews are in between structured and unstructured interviews. A major part of the semistructured interview (perhaps as much as 80 percent) is based on structured questions, but some time is set aside for unstructured interviewing to allow the interviewer to probe into ambiguous or missing information uncovered during the structured portion of the interview. How well do interviews predict future job performance? Contrary to what you’ve probably heard, recent evidence indicates that even unstructured interviews do a fairly good job.88 When conducted properly, however, structured interviews can lead to much more accurate hiring decisions than unstructured interviews. In some cases, the validity of structured interviews can rival that of cognitive ability tests. But even more important, because interviews are especially good at assessing applicants’ interpersonal skills, they work particularly well with cognitive ability tests. The combination (i.e., smart people who work well in conjuction with others) leads to even better selection decisions than using either alone.89 Exhibit 11.10 provides a set of guidelines for conducting effective structured employment interviews.
Review 4: Selection Selection is the process of gathering information about job applicants to decide who should be offered a job. Accurate selection procedures are valid, are legally defendable, and improve organizational performance. Application forms and résumés are the most common selection devices. Because many application forms request illegal, non-job-related information, and as many as one-third of Interview Stage
Exhibit 11.10 Guidelines for Conducting Effective Structured Interviews
What to Do
Identify and define the knowledge, skills, abilities, and other (KSAO) characteristics needed for successful job performance.
Planning the Interview
For each essential KSAO, develop key behavioral questions that will elicit examples of past accomplishments, activities, and performance. For each KSAO, develop a list of things to look for in the applicant’s responses to key questions.
Create a relaxed, nonstressful interview atmosphere. Review the applicant’s application form, résumé, and other information.
Conducting the Interview
Allocate enough time to complete the interview without interruption. Put the applicant at ease; don’t jump right into heavy questioning. Tell the applicant what to expect. Explain the interview process. Obtain job-related information from the applicant by asking those questions prepared for each KSAO. Describe the job and the organization to the applicant. Applicants need adequate information to make a selection decision about the organization.
Immediately after the interview, review your notes and make sure they are complete.
After the Interview
Evaluate the applicant on each essential KSAO. Determine each applicant’s probability of success and make a hiring decision.
Source: B. M. Farrell, “The Art and Science of Employment Interviews,“ Personnel Journal 65 (1986): 91–94.
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job applicants falsify information on résumés, these procedures are often of little value in making hiring decisions. References and background checks can also be problematic, given that previous employers are reluctant to provide such information for fear of being sued for defamation. Unfortunately, without this information, other employers are at risk of negligent hiring lawsuits. Selection tests generally do the best job of predicting applicants’ future job performance. In general, cognitive ability tests, work sample tests, biographical data, and assessment centers are the most valid tests, followed by personality tests and specific ability tests, which are still good predictors. Selection tests aren’t perfect predictors of job performance, but almost nothing predicts future job performance as well as selection tests. The three kinds of job interviews are unstructured, structured, and semistructured interviews. Of these, structured interviews work best because they ensure that all applicants are consistently asked the same situational, behavioral, background, or job-knowledge questions.
Developing Qualified Workers Harmon Industries, which makes signaling and communications equipment for the railway and transit industries, has a new training center where its employees learn engineering, safety, teamwork, time management, and other workplace skills. Ron Breshears, Harmon’s vice president of human resources and safety, says, “Training is an investment, not a cost. Once you see that, you see that you get a good return on your investment.”90 Indeed, according to the American Society for Training and Development, a typical investment in training increases productivity by an average of 17 percent, reduces employee turnover, and makes companies more profitable.91 Giving employees the knowledge and skills they need to improve their performance is just the first step in developing employees, however. The second step, and not enough companies do this, is giving employees formal feedback about their actual job performance. A CEO of a large telecommunications company hired an outside consultant to assess and coach (i.e., provide feedback) the company’s top 50 managers. To the CEO’s surprise, 75 percent of those managers indicated that the feedback they received from the consultant regarding their strengths and weaknesses was the only substantial feedback they had received about their performance in the last five years. On a more positive note, as a result of that feedback, two-thirds of the managers then took positive steps to improve their skills, knowledge, and job performance and expressed a clear desire for more feedback, especially from their boss, the CEO.92 So, in today’s competitive business environment, even top managers understand the importance of formal performance feedback to their growth and development. 5 6
5 training Developing the skills, experience, and knowledge employees need to perform their jobs or improve their performance.
After reading the next two sections, you should be able to describe how to determine training needs and select the appropriate training methods. discuss how to use performance appraisal to give meaningful performance feedback.
TRAINING
Training means providing opportunities for employees to develop the job-specific skills, experience, and knowledge they need to do their jobs or improve their performance. American companies spend more than $60 billion a year on training. To make sure those training dollars are well spent, companies need to 5.1 determine specific training needs, 5.2 select appropriate training methods, and 5.3 evaluate training.
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5.1 Determining Training Needs Needs assessment is the process of identifying and prioritizing the learning needs
needs assessment
of employees. Needs assessments can be conducted by identifying performance deficiencies, listening to customer complaints, surveying employees and managers, or formally testing employees’ skills and knowledge. The Work Keys method created by American College Testing (maker of the ACT test used for college admissions) in Iowa City, Iowa, is a needs assessment tool used for 7,000 different jobs by more than 1,400 companies nationwide.93 Work Keys is a series of tests that can be used to determine employees’ knowledge and skill levels in communication (listening, reading for information, and writing), problem solving (applied mathematics, applied technology, locating information, and observation), and interpersonal skills (teamwork). As shown in Step 1 of Exhibit 11.11, a needs assessment using Work Keys begins with a job analysis (what ACT calls “job profiling”) to determine the knowledge and skill levels required to perform a job successfully. Step 1 shows that a worker needs a skill level of 3 in applied technology, a 4 in reading for information and teamwork, and a 5 in applied mathematics (skill levels range from 1 to 6) to do well in a manufacturing job. Following the job analysis, employees are tested to see how well their skills match those required for the job, as shown in Step 2 of Exhibit 11.11. Then, as shown in Step 3 of the exhibit, employees’ skill levels are compared to the requirements for the job. The greater the difference between an employee’s skill levels and those required, the greater the need for training. Based on the Work Keys needs assessment, this employee needs some training in reading for information, applied mathematics, and teamwork. Note that training should never be conducted without first performing a needs assessment. Sometimes, training isn’t needed at all or isn’t needed for all employees. Since the needs assessment shown in Exhibit 11.11 indicates that the employee’s applied technology skills match those required for the job, it would be a waste of time and money to send this employee for training in that area. Unfortunately, however, many organizations simply require all employees to attend training, whether they need to or not. As a result, employees who are not interested or don’t need the training may react negatively during or after training. Likewise, employees who should be sent for training but aren’t may also react negatively. Consequently, a needs assessment is an important tool for deciding who should or should not attend training. In fact, employment law restricts employers from discriminating on the basis of age, gender, race, color,
The process of identifying and prioritizing the learning needs of employees.
Determine the knowledge and skill levels required to do the job.
Skill Levels
Skill Levels
6 5 4
Have employees take the Work Keys assessments to see how their skills match those required for the job.
5 4
3
4
Work Keys Needs Assessment for a Manufacturing Job
Compare each employee’s skill levels to the skill reqirements for the job to see where skills could be improved. Skill Levels
6
6
5
5 4
4
3
Exhibit 11.11
3
3
3
3
4
3
3
2
2
1
1
1
Applied Mathematics
Teamwork Applied Technology
Reading for Information Applied Mathematics
Teamwork Applied Technology
5
4
2
Reading for Information
Areas of Need
4
Reading for Information Applied Mathematics
4 3
3
Teamwork Applied Technology
Source: “Work Keys for Business: The System in Action,” ACT: Information for Life’s Transactions, [Online] available at http://www/act.org/workkeys/business/action.html/, 31 May 2003. Copyright 1999 by Act, Inc.
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religion, national origin, or disability when selecting training participants. Instead, just like hiring decisions, the selection of training participants should be based on job-related information.
5.2 Training Methods
SIMULEARN, INC. USED WITH PERMISSION.
Avatars are a new tool in corporate training. This image from SimuLearn shows a screen from a leadership course. A simulated meeting is held to discuss why a company party and sales retreat is no longer effective and the player (trainee) must decide what to do.
Assume that you’re a training director for a bank and that you’re in charge of making sure that all bank employees know what to do in case of a robbery. Exhibit 11.12 on the next page lists a number of training methods you could use: films and videos, lectures, planned readings, case studies, coaching and mentoring, group discussions, on-the-job training, role-playing, simulations and games, vestibule training, and computer-based learning. Which method would be best? To choose the best method, you should consider a number of factors, such as the number of people to be trained, the cost of training, and the objectives of the training. For instance, if the training objective is to impart information or knowledge to trainees, then you should use films and videos, lectures, and planned readings. In our robbery training example, trainees would hear, see, or read about what to do in case of a robbery. If developing analytical and problem-solving skills is the objective, then use case studies, group discussions, and coaching and mentoring. In our example, trainees would read about a real robbery, discuss what to do, and then talk to people who had been through robberies. If practicing, learning, or changing job behaviors is the objective, then use on-the-job training, role-playing, simulations and games, and vestibule training. In our example, trainees would learn about robbery situations on the job, pretend that they were in a robbery situation, or participate in a highly realistic mock robbery. If training is supposed to meet more than one of these objectives, then your best choice may be to combine one of the previous methods with computerbased training. CDW (Computer Discount Warehouse) now uses avatar-based training. An avatar is a computerized depiction of a person. If you’ve ever played a video game, you’ve encountered an avatar. When CDW account manager Danielle Paden took a sales course, the avatar first described a situation: such as an unhappy customer whose computer won’t connect to her high-speed Internet hookup. Then, a picture of the customer would appear on the screen, accompanied by audio of the customer speaking. Finally, with help from the avatar if she needed it (just click on the avatar), Paden would decide what to do and then receive feedback from the avatar and another response from the customer. Paden described the training as “the closest thing you can get to [actual] client interactions” and said that “the avatar went through almost every situation you will run across.”94 These days, many companies are adopting Internet training or “e-learning.” For instance, Dow Chemical now has the ability to provide electronic learning or training to all 40,000 employees in 70 countries using its
[email protected] Web-based training system.95 Likewise, Cisco Systems offers 4,500 e-learning courses to its managers and employees.96 Internet training or e-learning can offer several advantages. Because employees don’t need to leave their jobs, travel costs are greatly reduced. Also, because employees can take training modules when it is convenient (in other words, they don’t have to fall behind at their jobs to attend week-long training courses), workplace
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TRAINING OBJECTIVE
Impart Information and Knowledge
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TRAINING METHOD
• Films and videos. Films and videos share information, illustrate problems and solutions, and effectively hold trainees’ attention. • Lectures. Trainees listen to instructors’ oral presentations. • Planned readings. Trainees read about concepts or ideas before attending training.
Develop Analytical and Problem-Solving Skills
• Case studies. Cases are analyzed and discussed in small groups. The cases present a specific problem or decision, and trainees develop methods for solving the problem or making the decision. • Coaching and mentoring. Coaching and mentoring of trainees by managers involves informal advice, suggestions, and guidance. This method is helpful for reinforcing other kinds of training and for trainees who benefit from support and personal encouragement. • Group discussions. Small groups of trainees actively discuss specific topics. The instructor may perform the role of discussion leader.
Practice, Learn, or Change Job Behaviors
• On-the-job training (OJT). New employees are assigned to experienced employees. The trainee learns by watching the experienced employee perform the job and eventually by working alongside the experienced employee. Gradually, the trainee is left on his or her own to perform the job. • Role-playing. Trainees assume job-related roles and practice new behaviors by acting out what they would do in job-related situations. • Simulations and games. Experiential exercises place trainees in realistic jobrelated situations and give them the opportunity to experience a job-related condition in a relatively low-cost setting. The trainee benefits from “hands-on experience” before actually performing the job where mistakes may be more costly. • Vestibule training. Procedures and equipment similar to those used in the actual job are set up in a special area called a “vestibule.” The trainee is then taught how to perform the job at his or her own pace without disrupting the actual flow of work, making costly mistakes, or exposing the trainee and others to dangerous conditions.
Impart Information and Knowledge; Develop Analytical and ProblemSolving Skills; and Practice, Learn, or Change Job Behaviors
• Computer-based learning. Interactive videos, software, CD-ROMs, personal computers, teleconferencing, and the Internet may be combined to present multimedia-based training.
Source: A. Fowler, “How to Decide on Training Methods,” People Management 25, no. 1 (1995): 36.
productivity should increase and employee stress should decrease. Finally, if the company’s technology infrastructure can support it, Internet training and e-learning can be much faster than traditional training methods. For example, British Telecom used an avatar-based course to train 4,500 salespeople in just over a month. Traditional classroom training would have cost twice as much and taken twice as long to deliver.97 There are, however, several disadvantages to Internet training or e-learning. First, despite its increasing popularity, it’s not always the appropriate training method. Internet training can be a good way to impart information, but it isn’t always as effective for changing job behaviors or developing problem-solving and analytical skills. Second, e-learning requires a significant investment in computers and high-speed Internet and network connections for all employees. Finally, though e-learning can be faster, many employees find it so boring and
Exhibit 11.12 Training Objectives and Methods
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unengaging that they may choose to do their jobs rather than complete e-learning courses when sitting alone at their desks. E-learning may become more interesting, however, as more companies incorporate gamelike features in training, such as avatars and competition, into their e-learning courses.
5.3 Evaluating Training After selecting a training method and conducting the training, the last step is to evaluate the training. Training can be evaluated in four ways: on reactions, how satisfied trainees were with the program; on learning, how much employees improved their knowledge or skills; on behavior, how much employees actually changed their on-the-job behavior because of training; or on results, how much training improved job performance, such as increased sales or quality, or decreased costs.98 In general, if done well, training provides meaningful benefits for most companies. For example, a study by the American Society for Training and Development shows that a training budget as small as $680 per employee can increase a company’s total return on investment by 6 percent.99
Review 5: Training Training is used to give employees the job-specific skills, experience, and knowledge they need to do their jobs or improve their job performance. To make sure training dollars are well spent, companies need to determine specific training needs, select appropriate training methods, and then evaluate the training. Needs assessments can be conducted by identifying performance deficiencies, listening to customer complaints, surveying employees and managers, or formally testing employees’ skills and knowledge. Selection of an appropriate training method depends on a number of factors, such as the number of people to be trained, the cost of training, and the objectives of the training. If the objective is to impart information or knowledge, then films and videos, lectures, and planned readings should be used. If developing analytical and problemsolving skills is the objective, then case studies, group discussions, and coaching and mentoring should be used. If practicing, learning, or changing job behaviors is the objective, then on-the-job training, role-playing, simulations and games, and vestibule training would be used. If training is supposed to meet more than one of these objectives, then it may be best to combine one of the previous methods with computer-based training. Training can be evaluated on reactions, learning, behavior, or results. 6
PERFORMANCE APPRAISAL
performance appraisal
Performance appraisal is the process of assessing how well employees are doing
The process of assessing how well employees are doing their jobs.
their jobs. Most employees and managers intensely dislike the performance appraisal process. One manager said, “I hate annual performance reviews. I hated them when I used to get them, and I hate them now that I give them. If I had to choose between performance reviews and paper cuts, I’d take paper cuts every time. I’d even take razor burns and the sound of fingernails on a blackboard.”100 Unfortunately, attitudes like this are all too common. In fact, 70 percent of employees are dissatisfied with the performance appraisal process in their companies. Likewise, according to the Society for Human Resource Management, 90 percent of human resource managers are dissatisfied with the performance appraisal systems used by their companies.101 Because performance appraisals are used for so many important purposes, companies with poor performance appraisal systems face tremendous problems. For example, performance appraisals are used as a basis for compensation, promotion, and training decisions. In human resource planning, performance appraisals are used for career planning and for making termination decisions. And because of their key role in so many organizational decisions, performance
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appraisals are also central to many of the lawsuits that employees (or former employees) file against employers. Let’s explore how companies can avoid some of these problems with performance appraisals by 6.1 accurately measuring job performance and 6.2 effectively sharing performance feedback with employees.
6.1 Accurately Measuring Job Performance
objective performance measures Measures of job performance that are easily and directly counted or quantified.
Almost Always Almost Always
Strongly Disagree
Almost Never Almost Never
Strongly Agree
Workers often have strong doubts about the accuracy of their performance appraisals—and they may be right. For example, it’s widely known that assessors are prone to errors when rating worker performance. Three of the most subjective performance measures common rating errors are central tendency, halo, and leniency. Central ten- Measures of job performance that redency error occurs when assessors rate all workers as average or in the middle quire someone to judge or assess a of the scale. Halo error occurs when assessors rate all workers as performing worker’s performance. at the same level (good, bad, or average) in all parts of their jobs. Leniency er- trait rating scales scales that indicate the extent ror occurs when assessors rate all workers as performing particularly well. Rating to which workers possess particular One of the reasons that managers make these errors is that they often don’t traits or characteristics. spend enough time gathering or reviewing performance data. Winston Connor, the former vice president of human resources at Huntsman Chemical, Exhibit 11.13 said, “Most of the time, it’s just a ritual that managers go through. They pull Subjective Performance Appraisal Scales out last year’s review, update it and 102 do it quickly.” What can be done to minimize rating errors and improve the accuracy with which job performance is measured? In general, two approaches Trait Rating Scale have been used: improving perfor1 2 3 4 5 1. Employee is a hard worker. mance appraisal measures themselves 1 2 3 4 5 2. Employee is reliable. and training performance raters to be more accurate. 1 2 3 4 5 3. Employee is trustworthy. One of the ways companies try to improve performance appraisal measures is to use as many objective performance measures as possible. Objective performance measures are measures Behavioral Observation Scale of performance that are easily and directly counted or quantified. ComDimension: Customer Service mon objective performance measures 1 2 3 4 5 1. Greets customers with a smile and a “hello.” include output, scrap, waste, sales, 2. Calls other stores to help customers find customer complaints, or rejection 1 2 3 4 5 merchandise that is not in stock. rates. But when objective performance 3. Promptly handles customer concerns and 1 2 3 4 5 complaints. measures aren’t available, and frequently they aren’t, subjective performance measures have to be used instead. Subjective performance measures require that someone judge or Dimension: Money Handling assess a worker’s performance. The most common kind of subjective 1. Accurately makes change from customer 1 2 3 4 5 transactions. performance measure is the trait rating scale shown in Exhibit 11.13. 2. Accounts balance at the end of the day, no Trait rating scales, also called graphic 1 2 3 4 5 shortages or surpluses. rating scales, ask raters to indicate 3. Accurately records transactions in computer the extent to which a worker pos1 2 3 4 5 system. sesses a particular trait or characteristic, such as reliability or honesty.
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behavioral observation scales (BOSs) Rating scales that indicate the frequency with which workers perform specific behaviors that are representative of the job dimensions critical to successful job performance.
rater training Training performance appraisal raters in how to avoid rating errors and increase rating accuracy.
Unfortunately, trait rating scales are typically inaccurate measures of performance. Not only are managers notoriously poor judges of employee traits, but the traits are not related to job performance in any meaningful way. So, instead of using trait rating scales, subjective performance should be measured using behavioral observation scales. Behavioral observation scales (BOSs) ask raters to rate the frequency with which workers perform specific behaviors representative of the job dimensions that are critical to successful job performance. Exhibit 11.13 shows a BOS for two important job dimensions for a retail salesperson: customer service and money handling. Notice that each dimension lists several specific behaviors characteristic of a worker who excels in that dimension of job performance. (Normally, the scale would list 7 to 12 items per dimension, not 3, as in the exhibit.) Not only do BOSs work well for rating critical dimensions of performance, but studies also show that managers strongly prefer BOSs for giving performance feedback; accurately differentiating between poor, average, and good workers; identifying training needs; and accurately measuring performance. And in response to the statement, “If I were defending a company, this rating format would be an asset to my case,” attorneys strongly preferred BOSs over other kinds of subjective performance appraisal scales.103 The second approach to improving the measurement of workers’ job performance is rater training. In rater training, performance raters are trained to avoid rating errors (i.e., central tendency, halo, and leniency) and to improve rating accuracy. In rater training designed to minimize rating errors, trainees view videotapes of managers observing an employee performing some aspect of a job. Following each video, trainees are asked how they would have rated the worker’s performance and how the manager on the tape would have rated it. Each videotape, however, is an example of the different kinds of rating errors. So trainees have a chance to observe rating errors being made (by the manager in the videotape) and then discuss how to avoid those errors. Another common form of rater training focuses on improving rater accuracy (rather than minimizing errors). Here, raters closely examine the key dimensions of job performance (e.g., customer service and money handling for the retail salesperson in our example) and discuss specific behaviors representative of each dimension. Trainees may then be asked to role-play examples of these behaviors or to watch videos showing behavioral examples of each dimension of job performance. Both kinds of rater training are effective.104
6.2 Sharing Performance Feedback
360-degree feedback A performance appraisal process in which feedback is obtained from the boss, subordinates, peers and coworkers, and the employees themselves.
After gathering accurate performance data, the next step is to share performance feedback with employees. Unfortunately, even when performance appraisal ratings are accurate, the appraisal process often breaks down at the feedback stage. Employees become defensive and dislike hearing any negative assessments of their work, no matter how small. Managers become defensive, too, and dislike giving appraisal feedback as much as employees dislike receiving it. One manager said, “I myself don’t go as far as those who say performance reviews are inherently destructive and ought to be abolished, but I agree that the typical annual-review process does nothing but harm. It creates divisions. It undermines morale. It makes people angry, jealous, and cynical. It unleashes a whole lot of negative energy, and the organization gets nothing in return.”105 What can be done to overcome the inherent difficulties in performance appraisal feedback sessions? Since performance appraisal ratings have traditionally been the judgments of just one person, the boss, one possibility is to use 360-degree feedback. In this approach, feedback comes from four sources: the
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boss, subordinates, peers and coworkers, and the employees themselves. The data, which are obtained anonymously (except for the boss), are then compiled into a feedback report comparing the employee’s self-ratings to those of the boss, subordinates, and peers and coworkers. Usually, a consultant or human resource specialist discusses the results with the employee. The advantage of 360-degree programs is that negative feedback (“You don’t listen.”) is often more credible when it comes from several people. For example, one boss who received 360-degree feedback thought he was a great writer, so he regularly criticized and corrected his subordinates’ reports. Though the subordinates had never discussed this among themselves, they all complained about it in the 360degree feedback and asked that he stop rewriting their reports. After receiving the feedback, he apologized and stopped.106 A word of caution, though: About half of the companies using 360-degree feedback for performance appraisal now use the feedback only for developmental purposes. They found that sometimes with raises and promotions on the line, peers and subordinates would give high ratings in order to get high ratings from others and that they would also distort ratings to harm competitors or help people they liked. A senior manager at a New York City marketing company agrees, saying that 360-degree feedback “also allows people to vent their frustrations and anger on bosses and colleagues in an insensitive way.”107 On the other hand, studies clearly show that ratees prefer to receive feedback from multiple raters, so 360-degree feedback is likely to continue to grow in popularity.108 Herbert Meyer, who has been studying performance appraisal feedback for more than 30 years, makes several recommendations for sharing performance feedback with employees.109 First, managers should separate developmental feedback, which is designed to improve future performance, from administrative feedback, which is used as a reward for past performance, such as for raises. When managers give developmental feedback, they’re acting as coaches, but when they give administrative feedback, they’re acting as judges. These roles, coaches and judges, are clearly incompatible. As coaches, managers are encouraging, pointing out opportunities for growth and improvement, and employees are typically open and receptive to feedback. But as judges, managers are evaluative, and employees are typically defensive and closed to feedback. Second, Meyer suggests that performance appraisal feedback sessions be based on written self-appraisals, in which employees carefully assess their own strengths, weaknesses, successes, and failures. Because employees play an active role in the review of their performance, managers can be coaches rather than judges. Also, because the focus is on future goals and development, both employees and managers are likely to be more satisfied with the process and more committed to future plans and changes. And, because the focus is on development and not administrative assessment, studies show that self-appraisals lead to more candid self-assessments than traditional supervisory reviews.110 See Exhibit 11.14 for a list of topics that Meyer recommends for discussion in performance appraisal feedback sessions. Finally, what people do with the performance feedback they receive matters. A study of 1,361 senior managers found that managers who reviewed their 360degree feedback with an executive coach (hired by the company) were more likely to set specific goals for improvement, ask their bosses for ways to improve, and subsequently improve their performance.111 Also, a five-year study of 252 managers found that their performance improved dramatically if they met with their subordinates to discuss their 360-degree feedback (“You don’t listen.”) and how they were going to address it (“I’ll restate what others have said before stating my opinion.”). Performance was dramatically lower for managers who never discussed their 360-degree feedback with subordinates and
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Overall progress—an analysis of accomplishments and shortcomings. Problems encountered in meeting job requirements. Opportunities to improve performance. Long-range plans and opportunities— for the job and for the individual’s career. General discussion of possible plans and goals for the coming year.
for managers who did not routinely do so (some managers did not review their 360-degree feedback with subordinates each year of the study). Why is discussing 360-degree feedback with subordinates so effective? These discussions help managers better understand their weaknesses, force them to develop a plan to improve, and demonstrate to the subordinates the managers’ public commitment to improving.112 In short, it helps to have people discuss their performance feedback with others, but it particularly helps to have them discuss their feedback with the people who provided it.
Review 6: Performance Appraisal Most employees and managers intensely dislike the performance appraisal process. Some of the problems associated with appraisals can be avoided, however, by accurately measuring job performance and effectively sharing performance feedback with employees. Managers are prone to three kinds of rating errors: central tendency, halo, and leniency error. One way to minimize rating errors is to use better appraisal measures, such as objective measures of performance or behavioral observation scales. Another method is to directly train performance raters to minimize errors and more accurately rate the important dimensions of job performance. After gathering accurate performance data, the next step is to share performance feedback with employees. One way to overcome the inherent difficulties in performance appraisal feedback is to provide 360-degree feedback, in which feedback is obtained from four sources: the boss, subordinates, peers and coworkers, and the employees themselves. Feedback tends to be more credible if it is heard from several sources. Traditional performance appraisal feedback sessions can be improved by separating developmental and administrative feedback and by basing feedback discussions on employee self-appraisals. Finally, especially for managers, it’s helpful to have people discuss the feedback they received with executive coaches or the people who provided it.
Source: H. H. Meyer, “A Solution to the Performance Appraisal Feedback Enigma,” Academy of Management Executive 5, no. 1 (1991): 68–76.
Exhibit 11.14 What to Discuss in a Performance Appraisal Feedback Session
Keeping Qualified Workers China has a population of 1.3 billion people, but in the Pearl River delta there aren’t enough workers to meet the skyrocketing demand for manufacturing workers. Consequently, companies such as Chigo Air Conditioning are having to work hard to keep their employees. In the last five years, Chigo has raised salaries, started giving bonuses to workers who stay longer than three years, and built brand new housing with TV sets and swimming pools to entice workers to stay.113 All this may not be enough, however, as Chinese economists estimate that companies will have to pay wages 40 to 50 percent higher to keep the workers they have and to fill the 2 million job openings in this part of China. Massey Energy, in Richmond, Virginia, faces similar problems keeping workers. With coal prices running $50 a ton, up from $30 two years ago, coal producers like Massey are running full out to meet demand. The rise in coal
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prices has been accompanied by a rise in demand for miners. Turnover is high as employees jump ship to work for Massey’s competitors at better pay and benefits. As a result, Massey has given all of its production workers raises ranging from 3 to 15 percent over the last year. Furthermore, it offered a $3 an hour raise to electricians who already make $27 an hour and can earn $90,000 a year with overtime pay. And, like Chigo Air Conditioning, Massey offers bonuses to workers who stay longer. Finally. Massey also gives its supervisors stock options to encourage them to stay.114 7 8
7
After reading the next two sections, you should be able to describe basic compensation strategies and explain how they affect human resource practice. discuss the four kinds of employee separations: termination, downsizing, retirements, and turnover.
COMPENSATION
Compensation includes both the financial and the nonfinancial rewards that organizations give employees in exchange for their work. Let’s learn more about compensation by examining the 7.1 compensation decisions that managers must make and 7.2 the role that employment benefits play in compensating today’s employees.
compensation The financial and nonfinancial rewards that organizations give employees in exchange for their work
7.1 Compensation Decisions As Exhibit 11.15 shows, there are four basic kinds of compensation decisions: pay level, pay variability, pay structure, and employment benefits. We’ll discuss employment benefits in the next subsection.115 Pay-level decisions are decisions about whether to pay workers at a level that is below, above, or at current market wages. Companies use job evaluation to set their pay structures. Job evaluation determines the worth of each job by job evaluation determining the market value of the knowledge, skills, and requirements needed A process that determines the worth of to perform it. After conducting a job evaluation, most companies try to pay the each job in a company by evaluating the market value of the knowledge, “going rate,” meaning the current market wage. There are always companies, skills, and requirements needed to however, whose financial situation causes them to pay considerably less than perform it. current market wages. The child-care industry, for example, has chronic difficulties filling jobs because it pays well below market wages. Also, because wages are so low (an average of $7.86 an hour, or $16,350 a year), the applicants it attracts are increasingly less qualified.116 Donna Krause, who runs Exhibit 11.15 Creative Learning and Child Care in Dundalk, Maryland, lost five child-care Kinds of Compensation Decisions teachers one August when all were hired away by higher-paying public school systems. All of the Pay Level Pay Pay Employment Variability Structure Benefits teachers who left all had college • Piecework degrees, but none of their • Commission replacements did.117 • Profit Sharing Some companies choose to • Employee Stock • Cafeteria Plans Ownership • Flexible Plans pay above-average wages to atPlans • Hierarchical • Payroll tract and keep employees. Above• Job Evaluation • Stock Options • Compressed Deductions market wages can attract a larger, more qualified pool of job applicants, increase the rate of job acceptance, decrease the time it takes to fill positions, and increase the time that employees stay.118 For example, the severe nursing shortage discussed at the beginning of the chapter has begin to
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piecework A compensation system in which employees are paid a set rate for each item they produce.
commission A compensation system in which employees earn a percentage of each sale they make.
profit sharing A compensation system in which a company pays a percentage of its profits to employees in addition to their regular compensation.
employee stock ownership plan (ESOP) A compensation system that awards employees shares of company stock in addition to their regular compensation.
stock options A compensation system that gives employees the right to purchase shares of stock at a set price, even if the value of the stock increases above that price.
ease because, as nursing professor Peter Buerhaus explained, “hospitals recognized that all their previous attempts weren’t working so they had to raise wages.”119 Three years ago, 13 percent of the nursing positions at the Ochsner Clinic in New Orleans were open. After raising salaries substantially and giving nurses more flexible schedule (for example, $50,000+ per year to work three 12-hour days per week), only 2.4 percent of its nursing positions were open, compared to a national average of 8.4 percent. Pay-variability decisions concern the extent to which employees’ pay varies with individual and organizational performance. Linking pay to performance is intended to increase employee motivation, effort, and job performance. Piecework, sales commissions, profit sharing, employee stock ownership plans, and stock options are common pay-variability options. For instance, under piecework pay plans, employees are paid a set rate for each item produced up to some standard (e.g., 35 cents per item produced for output up to 100 units per day). Once productivity exceeds the standard, employees are paid a set amount for each unit of output over the standard (e.g., 45 cents for each unit above 100 units). Under a sales commission plan, salespeople are paid a percentage of the purchase price of items they sell. The more they sell, the more they earn. Because pay plans such as piecework and commissions are based on individual performance, they can reduce the incentive that people have to work together. Therefore, companies also use group incentives (discussed in Chapter 10) and organizational incentives, such as profit sharing, employee stock ownership plans, and stock options, to encourage teamwork and cooperation. With profit sharing employees receive a portion of the organization’s profits to over and above their regular compensation. The more profitable the company, the more profit is shared. When Ford Motor Company reported record profits, each of its automobile assembly workers received a profit-sharing check of approximately $8,000. When Ford lost money, however, no one got a profitsharing check because the company did not have any profits to distribute.120 Employee stock ownership plans (ESOPs) compensate employees by awarding them shares of the company stock in addition to their regular compensation. At McKay Nursery in Waterloo, Wisconsin, Joe Hernandez, a 41-year-old migrant worker, makes $20,000 a year working from April to November. But Joe also gets an additional 20 to 25 percent in company stock. So far, he’s accumulated more than $80,000 through the company ESOP.121 Stock options give employees the right to purchase shares of stock at a set price. Options work like this. Let’s say that you are awarded the right (or option) to buy 100 shares of stock from the company for $5 a share. If the company’s stock price rises to $15 a share, you can exercise your options and make $1,000. When you exercise your options, you pay the company $500 (100 shares at $5 a share), but because the stock is selling for $15 in the stock market, you can sell your 100 shares for $1,500 and make $1,000. Of course, as the company’s profits and share values increase, stock options become even more valuable to employees. Stock options have no value, however, if the company’s stock falls below the option “grant price,” the price at which the options have been issued to you. For instance, the options you have on 100 shares of stock with a grant price of $5 aren’t going to do you a lot of good if the company’s stock is worth $2.50. Why exercise your stock options and pay $5 a share for stock that sells for $2.50 a share in the stock market? (Stock options are said to be “underwater” when the grant price is lower than the market price.) Proponents of stock options argue that this gives employees and managers a strong incentive to work hard to make the company successful. If they do, the company’s profits and stock price increase, and their stock options increase in value. If they don’t, profits stagnate or turn into losses, and their stock options decrease in value or become worthless. To learn more about ESOPs and stock options, see The National Center for Employee Ownership (http://www.nceo.org).
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Pay-structure decisions are concerned with internal pay distributions, meaning the extent to which people in the company receive very different levels of pay.122 With hierarchical pay structures, there are big differences from one pay level to another. The highest pay levels are for people near the top of the pay distribution. The basic idea behind hierarchical pay structures is that large differences in pay between jobs or organizational levels should motivate people to work harder to obtain those higher-paying jobs. Many publicly owned companies have hierarchical pay structures by virtue of the huge amounts they pay their top managers and CEOs. For example, the average CEO now makes 289 times as much as the average worker, down from 475 times the pay of average workers just five years ago. But with CEO pay packages averaging $9.6 million per year and average workers earning just $33,176, the difference is still incredible.123 By contrast, compressed pay structures typically have fewer pay levels and smaller differences in pay between levels. Pay is less dispersed and more similar across jobs in the company. The basic idea behind compressed pay structures is that similar pay levels should lead to higher levels of cooperation, feelings of fairness and a common purpose, and better group and team performance. So should companies choose hierarchical or compressed pay structures? The evidence isn’t straightforward, but studies seem to indicate that there are significant problems with the hierarchical approach. The most damaging finding is that there appears to be little link between organizational performance and the pay of top managers.124 Furthermore, studies of professional athletes indicate that hierarchical pay structures (e.g., paying superstars 40 to 50 times more than the lowest-paid athlete on the team) hurt the performance of teams and individual players.125 Likewise, managers are twice as likely to quit their jobs when their companies have very strong hierarchical pay structures (i.e., when they’re paid dramatically less than the people above them).126 For now, it seems that hierarchical pay structures work best for independent work, where it’s easy to determine the contributions of individual performers and little coordination with others is needed to get the job done. In other words, hierarchical pay structures work best when clear links can be drawn between individual performance and individual rewards. By contrast, compressed pay structures, in which everyone receives similar pay, seem to work best for interdependent work, which requires employees to work together. Some companies are pursuing a middle ground: they are trying to combine hierarchical and compressed pay structures by giving ordinary workers the chance to earn more through ESOPs, stock options, and profit sharing.
7.2 Employment Benefits Employment benefits include virtually any kind of compensation other than direct wages paid to employees.127 Three employee benefits are mandated by law: Social Security, worker’s compensation, and unemployment insurance. To attract and retain a good work force, however, most organizations offer a wide variety of benefits, including retirement plans and pensions, paid holidays, paid vacations, sick leave, health insurance, life insurance, dental care, eye care, daycare facilities, paid personal days, legal assistance, physical fitness facilities, educational assistance, and discounts on company products and services. Currently, benefits cost organizations about 29.3 percent of their payroll, with an average cost of $15,000 per employee for a basic benefits plan.128 Managers should understand that although benefits are unlikely to improve employee motivation and performance, they do affect job satisfaction, employee decisions about staying or leaving the company, and the company’s attractiveness to job applicants.129 One way that organizations make their benefit plans more attractive is by offering cafeteria benefit plans or flexible benefit plans, which allow employees to choose which benefits they receive, up to a
employment benefits A method of rewarding employees that includes virtually any kind of compensation other than wages or salaries.
cafeteria benefit plans (flexible benefit plans) Plans that allow employees to choose which benefits they receive, up to a certain dollar value.
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certain dollar value.130 Many cafeteria or flexible benefit plans start with a core of benefits, such as health insurance and life insurance, that are available to all employees. Then employees are allowed to select the other benefits that best fit their needs, up to a predetermined dollar amount. Some organizations allow employees to choose from several packages of benefits. The packages are of equivalent value, but offer a different mix of benefits. For example, older employees may prefer more benefit dollars spent on retirement plans, while younger employees may prefer additional vacation days. Pretax payroll deductions, which enable employees to pay for expenses such as medical care, day care, and commuting out of pretax dollars, are one of the more popular benefits options because they provide significant tax savings for employees and organizations. Nevertheless, only 18 percent of eligible employees participate in their company’s pretax payroll deduction plan. The problem, as a typical worker Kate Morrison explained, has been that “by the time you filled out the paperwork and mailed it off and they processed it, it could take up to 45 days to get your money back [from your pretax account].”131 Now, however, some companies have solved these problems by giving employees a debit card attached to their pretax spending accounts that they can use to pay expenses directly, thereby avoiding the paperwork and the wait for reimbursement. The drawback to flexible benefit plans has been the high cost of administering them. With advances in information processing technology and HRISs, however, the cost has begun to drop in recent years.
Review 7: Compensation Compensation includes both the financial and the nonfinancial rewards that organizations give employees in exchange for their work. There are four basic kinds of compensation decisions: pay level, pay variability, pay structure, and employment benefits. Pay-level decisions determine whether workers will receive wages below, above, or at current market levels. Pay-variability decisions concern the extent to which pay varies with individual and organizational performance. Piecework, sales commissions, profit sharing, employee stock ownership plans, and stock options are common pay-variability options. Pay-structure decisions concern the extent to which people in the company receive very different levels of pay. Hierarchical pay structures work best for independent work, while compressed pay structures work best for interdependent work. Employee benefits include virtually any kind of compensation other than direct wages paid to employees. Flexible or cafeteria benefit plans offer employees a wide variety of benefits, improve job satisfaction, increase the chances that employees will stay with companies, and make organizations more attractive to job applicants. The cost of administering flexible benefit plans has begun to drop in recent years. 8 employee separation The voluntary or involuntary loss of an employee.
EMPLOYEE SEPARATIONS
Employee separation is a broad term covering the loss of an employee for any reason. Involuntary separation occurs when employers decide to terminate or lay off employees. Voluntary separation occurs when employees decide to quit or retire. Because employee separations affect recruiting, selection, training, and compensation, organizations should forecast the number of employees they expect to lose through terminations, layoffs, turnover, or retirements when doing human resource planning.
Let’s explore employee separation by examining 8.1 terminations, 8.2 downsizing, 8.3 retirements, and 8.4 turnover.
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8.1 Terminating Employees Hopefully, the words “You’re fired!” have never been directed at you. Lots of people hear them, however, as more than 400,000 people a year get fired from their jobs. Getting fired is a terrible thing, but many managers make it even worse by bungling the firing process, needlessly provoking the person who was fired and unintentionally inviting lawsuits. For example, one worker learned he had been fired only after a restaurant told him that his company credit card was no longer active. The top office manager for a professional sports team returned to the office to find his parking space taken by someone interviewing for his job. The CEO of a clothing store company gave all of his top managers a fruit basket one holiday season, except his top finance manager who was soon fired.132 A computer systems engineer was fired on “Take Your Daughter to Work Day,” with his eight-year-old daughter sitting next to him in the human resource manager’s office. He and his daughter were both escorted from the building.133 How would you feel if you had been fired in one of these ways? Though firing is never pleasant (and managers hate firings nearly as much as employees do), managers can do several things to minimize the problems inherent in firing employees. First, in most situations, firing should not be the first option. Instead, employees should be given a chance to change their behavior. When problems arise, employees should have ample warning and must be specifically informed as to the nature and seriousness of the trouble they’re in. After being notified, they should be given sufficient time to change. If the problems continue, the employees should again be counseled about their job performance, what could be done to improve it, and the possible consequences if things don’t change (e.g., written reprimand, suspension without pay, or firing). Sometimes this is enough to solve the problem. If the problem isn’t corrected after several rounds of warnings and discussions, however, the employee may be terminated.134 Second, employees should be fired only for a good reason. Employers used to hire and fire employees under the legal principle of “employment at will,” which allowed them to fire employees for a good reason, a bad reason, or no reason at all. (Employees could also quit for a good reason, a bad reason, or no reason whenever they desired.) As employees began contesting their firings in court, however, the principle of wrongful discharge emerged. Wrongful discharge is a legal doctrine that requires employers to have a job-related reason to terminate employees. In other words, like other major human resource decisions, termination decisions should be made on the basis of job-related factors, such as violating company rules or consistently poor performance. And with former employees winning 68 percent of wrongful discharge cases and the average wrongful termination award at $532,000 and climbing, managers should record the job-related reasons for the termination, document specific instances of rule violations or continued poor performance, and keep notes and documents from the counseling sessions held with employees.135 Finally, to reduce the chances of a wrongful discharge suit, employees should always be fired in private. State the reason for discharge, but don’t go into detail or engage in a lengthy discussion with the employee. Make every attempt to be as kind and respectful as possible when informing someone that he or she is being fired. It is permissible, and sometimes a good idea, to have a witness present. This person should be from human resources or part of the employee’s chain of command, such as the supervisor’s boss. Company security may be nearby, but should not be in the room unless the employee has made direct threats toward others. Finally, managers should be careful not to publicly criticize the employee who has just been fired, as this can also lead to a wrongful discharge lawsuit. In general, unless someone has a “business reason to know”
wrongful discharge A legal doctrine that requires employers to have a job-related reason to terminate employees.
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why an employee was fired, the reasons and details related to the firing should remain confidential.136
8.2 Downsizing downsizing
Downsizing is the planned elimination of jobs in a company. Whether it’s because
The planned elimination of jobs in a company.
of cost cutting, declining market share, overaggressive hiring and growth, or outsourcing, companies typically eliminate 1 to 1.9 million jobs a year.137 Twothirds of companies that downsize will downsize a second time within a year. For example, Eastman Kodak recently announced that it would be eliminating 21 percent of its work force—12,000 to 15,000 jobs—over the next two years. Previously, because of the long-term decline in its core photography business, Kodak had laid off 50,000 workers in an effort to cut costs.138 Does downsizing work? In theory, downsizing is supposed to lead to higher productivity and profits, better stock performance, and increased organizational flexibility. However, numerous studies demonstrate that it doesn’t. For instance, a 15-year study of downsizing found that downsizing 10 percent of a company’s work force produced only a 1.5 percent decrease in costs; that firms that downsized increased their stock price by only 4.7 percent over three years, compared to 34.3 percent for firms that didn’t; and that profitability and productivity were generally not improved by downsizing.139 These results make it clear that the best strategy is to conduct effective human resource planning and avoid downsizing altogether. Indeed, downsizing should always be a last resort. If companies do find themselves in financial or strategic situations where downsizing is required for survival, however, they should train managers in how to break the news to downsized employees, have senior managers explain in detail why downsizing is necessary, and time the announcement so that employees hear it from the company and not from other sources, such as TV or newspaper reports.140 Finally, companies should do everything they can to help downsized employees find other jobs. One of the best ways to do this is to use outplacement services that provide employment-counseling services for employees faced with downsizing. Outplacement services often include advice and training in preparing résumés, getting ready for job interviews, and even identifying job opportunities in other companies. Fifty-five percent of companies provide outplacement services for laid-off employees, 76 percent provide extended health coverage, and 45 percent offer extended access to employee assistance programs.141 Exhibit 11.16 provides additional guidelines for conducting layoffs. Companies also need to pay attention to the “survivors,” the employees remaining after layoffs have occurred. Management professor Peter Cappelli says that survivors, “may feel like they could just as easily be the next person laid off.”142 Management consultant Diane Durken agrees, “The people who are left behind start looking behind their backs and saying, ‘Am I next?’ They need to be rejuvenated, so they can refocus on the future. Honesty and integrity are the core of this.”143 The key to working with layoff survivors, according to Barry Nickerson, president of Dallas-based Marlow Industries, which downsized from 800 to 200 employees, is “Communicate. Communicate. Communicate.” Nickerson says, “Every time we had a change we had a meeting to explain exactly what we were doing. We were very open with our employees about where we were financially. We would explain exactly the current status and where we were.”144
outplacement services Employment-counseling services offered to employees who are losing their jobs because of downsizing.
early retirement incentive programs (ERIPs) Programs that offer financial benefits to employees to encourage them to retire early.
8.3 Retirement Early retirement incentive programs (ERIPs) offer financial benefits to employees to
encourage them to retire early. Companies use ERIPs to reduce the number of employees in the organization, to lower costs by eliminating positions after
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1. Provide clear reasons and explanations for the layoffs. 2. To avoid laying off employees with critical or irreplaceable skills, knowledge, and expertise, get input from human resources, the legal department, and several levels of management. 3. Train managers in how to tell employees that they are being laid off (i.e., stay calm; make the meeting short; explain why, but don’t be personal; and provide information about immediate concerns, such as benefits, job search, and collecting personal goods). 4. Give employees the bad news early in the day, and try to avoid laying off employees before holidays. 5. Provide outplacement services and counseling to help laid-off employees find new jobs. 6. Communicate with survivors to explain how the company and their jobs will change. Source: M. Boyle, “The Not-So-Fine Art of the Layoff,” Fortune, 19 March 2001, 209.
Exhibit 11.16
employees retire, to lower costs by replacing high-paid retirees with lower-paid, less-experienced employees, or to create openings and job opportunities for people inside the company. For example, the state of Wyoming offered its employees a lump-sum bonus, additional insurance benefits, and increased monthly retirement payments to encourage early retirement. Its ERIP must have been fairly attractive because 56 percent of the state employees eligible for early retirement accepted. Thirty percent of the 437 positions vacated by the early retirees remained empty, saving the state $23.2 million over the first 46 months of the program and a projected $65 million over eight years. After accounting for the costs of the increased early retirement benefits, the predicted savings came to more than $148,000 per retiree.145 Although ERIPs can save companies money, they can pose a big problem for managers if they fail to accurately predict which employees—the good performers or the poor performers—and how many will retire early. Consultant Ron Nicol says, “The thing that doesn’t work is just asking for volunteers. You get the wrong volunteers. Some of your best people will feel they can get a job anywhere. Or you have people who are close to retirement and are a real asset to the company.”146 When Ameritech Corporation (now part of SBC Communications) offered an ERIP, it carefully identified the number of employees near retirement age and estimated that 5,000 to 6,000 of its 48,000 employees would take advantage of the program. Instead, nearly 22,000 employees accepted the ERIP offer and applied for early retirement!147 Because of the problems associated with ERIPs, many companies are now offering phased retirement, in which employees transition to retirement by working reduced hours over a period of time before completely retiring. The advantage for employees is that they have more free time, but continue to earn salaries and benefits without changing companies or careers. The advantage for companies is that it allows them to reduce salaries and hiring and training costs and retain experienced, valuable workers.148
Guidelines for Conducting Layoffs
phased retirement Employees transition to retirement by working reduced hours over a period of time before completely retiring.
8.4 Employee Turnover Employee turnover is the loss of employees who voluntarily choose to leave the
employee turnover
company. In general, most companies try to keep the rate of employee turnover low to reduce recruiting, hiring, training, and replacement costs. Not all kinds of employee turnover are bad for organizations, however. In fact, some turnover can actually be good. For instance, functional turnover is the loss of poor-performing employees who choose to leave the organization.149 Functional turnover gives the organization a chance to replace poor performers with better workers. In fact, one study found that simply replacing poor-performing leavers with average workers would increase the revenues produced by retail salespeople
Loss of employees who voluntarily choose to leave the company.
functional turnover Loss of poor-performing employees who voluntarily choose to leave a company.
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dysfunctional turnover Loss of high-performing employees who voluntarily choose to leave a company.
in an upscale department store by $112,000 per person per year.150 By contrast, dysfunctional turnover, the loss of high performers who choose to leave, is a costly loss to the organization. Employee turnover should be carefully analyzed to determine whether good or poor performers are choosing to leave the organization. If the company is losing too many high performers, managers should determine the reasons and find ways to reduce the loss of valuable employees. The company may have to raise salary levels, offer enhanced benefits, or improve working conditions to retain skilled workers. One of the best ways to influence functional and dysfunctional turnover is to link pay directly to performance. A study of four sales forces found that when pay was strongly linked to performance via sales commissions and bonuses, poor performers were much more likely to leave (i.e., functional turnover). By contrast, poor performers were much more likely to stay when paid large, guaranteed monthly salaries and small sales commissions and bonuses.151
Review 8: Employee Separations Employee separation is the loss of an employee, which can occur voluntarily or involuntarily. Before firing or terminating employees, managers should give employees a chance to improve. If firing becomes necessary, it should be done because of job-related factors, such as violating company rules or consistently performing poorly. Downsizing is supposed to lead to higher productivity and profits, better stock performance, and increased organizational flexibility, but studies show that it doesn’t. The best strategy is to downsize only as a last resort. Companies that do downsize should offer outplacement services to help employees find other jobs. Companies use early retirement incentive programs to reduce the number of employees in the organization, lower costs, and create openings and job opportunities for people inside the company. The biggest problem with ERIPs is accurately predicting who and how many will accept early retirement. Companies generally try to keep the rate of employee turnover low to reduce costs. Functional turnover can be good for organizations, however, because it offers the chance to replace poor performers with better workers. Managers should analyze employee turnover to determine who is resigning and take steps to reduce the loss of good performers.
Key Terms adverse impact, 345 assessment centers, 356 background checks, 353 behavioral observation scales (BOSs), 366 biographical data (biodata), 355 bona fide occupational qualification (BFOQ), 343 cafeteria benefit plans (flexible benefit plans), 371 cognitive ability tests, 355 commission, 370 compensation, 369 disparate treatment, 345
downsizing, 374 dysfunctional turnover, 376 early retirement incentive programs (ERIPs), 374 employee separation, 372 employee stock ownership plan (ESOP), 370 employee turnover, 375 employment benefits, 371 employment references, 353 external recruiting, 350 four-fifths (or 80 percent) rule, 345 functional turnover, 375 hostile work environment, 346
human resource information system (HRIS), 340 human resource management (HRM), 338 human resource planning (HRP), 339
internal recruiting, 350 interviews, 357 job analysis, 348 job description, 348 job evaluation, 369 job specifications, 348 needs assessment, 361 objective performance measures, 365
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outplacement services, 374 performance appraisal, 364 personality tests, 356 phased retirement, 375 piecework, 370 profit sharing, 370 quid pro quo sexual harassment, 345 rater training, 366 recruiting, 347
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selection, 352 sexual harassment, 345 specific ability tests (aptitude tests), 354
stock options, 370 structured interviews, 357 subjective performance measures,
training, 360 trait rating scales, 365 unstructured interviews, 357 validation, 352 work force forecasting, 339 work sample tests, 356 wrongful discharge, 373
365
360-degree feedback, 366
Concept Check 1. Outline the basic process for human resource planning. 2. List and describe the major employment laws affecting human resource practice. 3. What are the two types of recruiting? How do companies use job analysis in recruiting? 4. What selection procedures do companies use during the hiring process? 5. Compare structured and unstructured interviews. 6. Describe the types of selection tests that companies use to evaluate job candidates.
7. Describe several training methods and indicate the objectives each is best suited to meet. 8. What methods can managers use to accurately measure employee job performance? 9. What kinds of decisions do managers face when designing employee compensation? 10. What are the four kinds of employee separations? 11. What is the difference between functional and dysfunctional turnover? What is the relationship between turnover and employee separations?
Self-Assessment INTERVIEW ANXIETY How would you feel if you got a call to interview for your dream job? Excited? Nervous? Or downright panicked? It’s not uncommon to get some “butterflies” in your stomach at the prospect of a job interview, but some candidates have more than weak knees and
sweaty palms. On page 620 of the Self-Assessment Appendix, you’ll find a 30-question survey designed to give you insights into your own reactions. Your score will be a baseline as you begin working on the skills you’ll need during your job hunt.
Management Decision OPEN FOR ABUSE This isn’t the first time you’ve had an employee who wanted to take leave under to the Family and Medical Leave Act (FMLA). The act has been in place for over a decade, and you’ve had employees take leave for childbirth, elder care, and to recover from surgery or injuries. In general, most people have used the FMLA as it was intended and have been relieved that they didn’t have to
choose between their job and caring for a family member. As with most things, however, there are always abuses, and you have occasionally had to grapple with a request for time off that you considered questionable. Today, you’ve received one of those requests. You operate two upscale restaurants, one in the financial district and one in the entertainment district. Last week, you had to move Cal, one of your experienced
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bartenders in the financial district location, from the happy hour to the lunch hour because you needed his experience. Although Cal would now be the team leader on the day shift, he was angry about the change, insisting that it amounted to a pay reduction because no one has three-martini lunches anymore. He said he’d only be serving soda and coffee, and tips on those drinks weren’t going to pay his rent. Even without drinks, lunchtime checks generally average $75 per table, so you assure Cal that once the five waitresses tip out (i.e., give a portion of their tips to the bartenders and table clearers), he should not experience a pay reduction. You reiterate that you really need him on days because the new crew is having trouble keeping up, even though they are just serving soda and coffee. Upon receiving his new assignment, Cal immediately announced his resignation. Before leaving at the end of his shift, however, he told you he had changed his mind. But today, he came in late and gave you a doctor’s note saying he required a 12-week leave for stress! Under the FMLA, stress is considered a serious health condition, so you have to grant Cal’s request and continue his health coverage. Legally, you can ask that he get a second opinion, but you can’t question a doctor’s
recommendation for time off. Cal has requested the maximum time allowed—12 weeks unpaid leave per year—and if he decides to come back after that, you have to keep his job for him. You are convinced, however, that he intends to quit when the 12 weeks are up. What are you going to do? Asking other employees to pick up the slack will create morale problems for both the day and evening shifts (they get testy enough when someone is on leave for a legitimate situation), but hiring a temporary replacement may not solve your problem. If you do hire a temp, you might find a great new employee whom you’d have to let go in 12 weeks if Cal does come back. Maybe you should just be thankful that Cal requested the leave in one block, instead of taking it in daily or hourly increments, which, according to the law, he could have done. Questions 1. How do you handle Cal’s three-month absence with the least disruption? 2. Do you have a frank discussion with Cal and ask him if he plans to return after his leave, or do you just plan around him? 3. How can businesses mitigate the unintended impact of the FMLA?
Management Team Decision A BEHAVIORAL INTERVIEW FOR YOUR PROFESSOR? Interviews are by far the most frequently used selection procedure. In fact, it’s rare for people to be hired without first being interviewed. But, as you learned in the chapter, managers often conduct unstructured interviews, in which they are free to ask applicants anything they want, and studies show that they do. Indeed, studies show that because interviewers often disagree about which questions should be asked during interviews, different interviewers tend to ask applicants very different questions. Individual interviewers even seem to have a tough time asking the same questions from one interview to the next. This high level of inconsistency lowers the validity of interviews as a selection device by making it difficult to compare applicant responses. As a result, unstructured interviews do about half as well as structured interviews in accurately predicting which job applicants should be hired. By contrast, with structured interviews, standardized interview questions are prepared ahead of time so that all applicants will be asked the same job-related questions. Consequently, comparing applicants is much easier than with unstructured interviews. Also, structuring interviews ensures that interviewers will ask for
only important, job-related information. These advantages significantly improve the accuracy, usefulness, and validity of interviews as a selection procedure. Since you’re likely to use interviewing more than any other selection procedure, the purpose of this assignment is to give you some experience creating questions for structured interviews. Form a team of three or four students. You’ll be writing questions for the job of college professor, a job with which all of you are familiar (having observed each of your instructors for an average of 40 hours per college class). Your team’s assignment is to write 12 questions that you would ask applicants who want to teach at your university. Remember, four kinds of questions are typically asked in structured interviews: situational, behavioral, background, and job-knowledge questions (see Section 4.4 in the chapter). You’ll be writing three questions of each kind. In phrasing your questions, make them open-ended questions, not closed-ended questions that can be answered with a “yes” or a “no.” The point of the interview is to get applicants to talk about themselves so that you can make a good hiring decision. Also, make sure your questions are job related. Finally,
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remember that if you were actually using this interview to hire college professors, every person interviewing for the job would be asked these 12 questions. So try to pick questions that would help you differentiate good instructors from bad instructors. For example, asking candidates where they received their Ph.D., which is a research degree, would probably not help you determine which candidates are most qualified to teach. Posing puzzles and riddles in interviews has also become popular since it was revealed that several successful companies regularly do this. Questions like “How would you move Mt. Fuji?” and “How would you weigh a 747 jumbo jet without a scale?” are meant to find out the candidate’s approach to solving problems. Some of the questions are unsolvable (like the Mt. Fuji one), and some seem merely fanciful (like “If the Star Trek transporter were for real, what implications would that have for the transportation industry?”).
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All, however, are meant to gauge the candidate’s creative problem-solving skills. You may want to include a couple of creative questions in your interview for this exercise. If so, you’ll need to be clear what characteristics you are trying to uncover by asking the question, for example, intelligence or resourcefulness. Assignment 1. Write three questions of each type (situational, behavioral, background, and job-knowledge) that your team would ask someone who wanted to teach at your university. 2. Next, try to write a few riddles or puzzle-type questions for the same candidate in question 1. Are riddles and puzzle-type questions appropriate interview tools for the position of college professor? Explain your decision.
Develop Your Career Potential 360-DEGREE FEEDBACK Whereas most performance appraisal ratings have traditionally come from just one person, the boss, 360degree feedback is obtained from four sources: the boss, subordinates, peers and coworkers, and the employees themselves. In this assignment, you will be gathering 360-degree feedback from people that you work with or from a team or group that you’re a member of for a class. Here are some guidelines for obtaining your 360degree feedback:
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Carefully select respondents. One of the keys to good 360-degree feedback is getting feedback from the right people. In general, the people you ask for feedback should interact with you on a regular basis and should have the chance to regularly observe your behavior. Also, be sure to get a representative sample of opinions from a similar number of coworkers and subordinates (assuming you have some). Get a large enough number of responses. Except for the boss, you should have a minimum of three respondents to give you feedback in each category (peers and subordinates). Five or six respondents per category is even better. Ensure confidentiality. Respondents are much more likely to be honest if they know that their comments are confidential and anonymous. So, when you ask respondents for feedback, have them return their comments to someone other than yourself. Have
•
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this person, we’ll call the person your “feedback facilitator,” remove the names and any other information that would identify who made particular comments. Explain how the 360-degree feedback will be used. In this case, explain that the feedback is for a class assignment, that the results will be used for your own personal growth and development, and that the feedback they give you will not affect your grade or formal assessment at work. Ask them to make their feedback as specific as possible. For instance, writing “bad attitude” isn’t very good feedback. Writing “won’t listen to others’ suggestions” would be much better because it would let you know how to improve your behavior. Have your respondents use the feedback form below to provide your feedback. Here’s what you need to turn in for this assignment:
1. The names and relationships (boss, peers, subordinates, classmates, teammates) of those whom you’ve asked for feedback. 2. The name of the person you’ve asked to be your feedback facilitator. 3. Copies of all written feedback that was returned to you. 4. A one-page summary of the written feedback. 5. A one-page plan in which you describe specific goals and action plans for responding to the feedback you received.
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360-Degree Feedback Form
As part of a class assignment, I, _______________, am collecting feedback from you about my performance. What you say or write will not affect my grade. The purpose of this assignment is for me to receive honest feedback from the people I work with in order to identify the things I’m doing well and the things that I need to improve. So please be honest and direct in your evaluation. When you have completed this feedback form, please return it to _______________. He or she has been selected as my feedback facilitator and is responsible for ensuring that your confidentiality and anonymity are maintained. After all feedback forms have been returned to _______________, he or she will make sure that your particular responses cannot be identified. Only then will the feedback be shared with me. Please provide the following feedback. Continue doing . . . Describe 3 things that _______________ is doing that are a positive part of his or her performance and that you want him or her to continue doing. 1. 2. 3. Start doing . . . Describe 3 things that _______________ needs to start doing that would significantly improve his or her performance. 1. 2. 3. Please make your feedback as specific and behavioral as possible. For instance, writing “needs to adjust attitude” isn’t very good feedback. Writing “needs to begin listening to others’ suggestions” is much better because the person now knows exactly how he or she should change his or her behavior. So please be specific. Also, please write more than one sentence per comment. This will help the feedback recipient better understand your comments.
Take Two
Biz Flix Bowfinger
This film, which brought Steve Martin and Eddie Murphy together for the first time, offers a funny look at Hollywood film making. Bobby Bowfinger (Martin), perhaps the least successful director in films, wants to produce a low-budget film with top star Kit Ramsey (Murphy). Bowfinger’s problem: recruit a crew and cast with almost no budget and trick Kit into appearing in his film. Bowfinger interviews several candidates for the Kit Ramsey lookalike role. He rejects everyone until Jifferson (Jiff ) Ramsey (also played by Murphy) auditions. This scene is an edited version of the “The Lookalike” sequence early in the film. It includes Jiff’s audition, interview, and a brief look at his first day at work. What to Watch for and Ask Yourself
1. Does Bobbie Bowfinger have a set of valid selection criteria for filling the role of a Kit Ramsey lookalike? Does Bowfinger apply the criteria uniformly to each applicant? 2. Is there a good person-job fit of Jiff Ramsey in the screen role of Kit Ramsey? 3. Do you predict that Jiff Ramsey will be successful as a Kit Ramsey substitute?
Management Workplace AMCI, Ziba Designs, Wahoo’s Fish Taco
Managing human resource (HR) systems is as complex an undertaking as any in business. AMCI is a manufacturer’s representative firm that sells things like glow-in-the-dark cockroaches, Groucho Marx glasses, and specialty gift items; Ziba Designs is an industrial design firm that develops innovative products for its clients; and Wahoo’s Fish Taco is a chain of surfer-themed restaurants in Southern California. As diverse as these three companies are, they all need to find qualified employees, train them for specific tasks and responsibilities, and then implement tools to keep them on the payroll long term. What to Watch for and Ask Yourself
1. What HR tools from the chapter are mentioned in the video? 2. Compare how the three companies in the video find qualified employees. 3. What retention strategies do these companies use? Why have Ziba and Wahoo’s focused on retention?
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Managing Individuals and a Diverse Work Force
C H A P T E R
O U T L I N E
Chapter12 What Would You Do? Diversity and Why It Matters 1. Diversity: Differences That Matter 1.1 Diversity Is Not Affirmative Action 1.2 Diversity Makes Good Business Sense
Diversity and Individual Differences 2. Surface-Level Diversity 2.1 2.2 2.3 2.4
Age Gender Race/Ethnicity Mental or Physical Disabilities
3. Deep-Level Diversity 3.1 Big Five Dimensions of Personality 3.2 Work-Related Personality Dimensions
How Can Diversity Be Managed? 4. Managing Diversity 4.1 Diversity Paradigms 4.2 Diversity Principles 4.3 Diversity Training and Practices
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise Xtra! Five exhibit worksheets, author FAQs, quiz, Management News, and the video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
Wal-Mart Headquarters, Bentonville, Arkansas.1 It all started when seven female employees in San Francisco sued for employment discrimination. Then a federal judge granted class-action status to the suit, allowing 1.5 million women who have worked or now work for Wal-Mart to join the lawsuit, and ordered the company to turn over 250 computer tapes containing payroll, performance, and promotion data for the last six years. When those data were analyzed by a statistics professor, here is what he found: JOB
Women
Men
Women
Men
Store manager $89,300 $105,700 14.30% 85.70% Co-manager
56,300
59,500
22.80% 77.20%
Asst. manager
37,300
39,800
35.70% 64.30%
Mgt. trainee
22,400
23,200
41.30% 58.70%
Cashier
13,800
14,500
92.50%
7.50%
Women were consistently paid less than men in the same jobs, especially store managers. And, while 65 percent of Wal-mart’s million+ employees were female, a much smaller percentage of women held key management jobs, again especially store manager positions (just 14.3 percent). Even after controlling for seniority, parttime status, store location, and job title, women were still paid 34 cents less an hour than male workers. Consistent with these data, it took the average woman 4.4 years to be promoted to assistant manager and 10 years to become a store manager, compared to just 2.9 years and 8.6 years, respectively, for the average man. Of course, Wal-Mart appealed the judge’s decision to expand the case from the seven original plaintiffs to the class-action suit with 1.5 million women. That appeal and then an eventual trial or settlement may take years. The question now is what does Wal-Mart do in the interim? Certainly, pressure is building for Wal-Mart to address these issues. Even Wal-Mart stock holders are not happy. A spokesperson for Libra Investments, which owns 30,000 shares of Wal-Mart stock, said, “We are increasingly concerned about the number of lawsuits filed against Wal-Mart and the number of negative articles in the press. We believe there is a longterm financial risk to shareholders, from
What Would You Do?
community resistance to stores to [price-to-earnings] contraction.” At Wal-Mart’s annual shareholders’ meeting, individual shareholder Barbara Ayers lectured Wal-Mart’s chairman of the board, Rob Walton, saying, “We need to know what the facts are—not pictures and presentations. All of us need to know the complete details of how this company operates. That is your challenge, Mr. Walton.” So, what should Wal-Mart do to address these issues as it waits for the case to wind its way through the court system? First, when it comes to promotions, what should the company’s policy be going forward? Should the company reserve a percentage of promotions for women? If so, on what basis? Or should it completely ignore gender in making promotion decisions? Some in the company argue that making any changes now is tantamount to an admission of guilt and would weaken the STUDY TIP company’s court case. Others In the margin next to each argue that both Wal-Mart’s paragraph or section in the female employees and the chapter, write the question public perceive the promotion that the section answers. For (and pay) differences as real and problematic, and that example, “What is the differsomething needs to be done ence between surface- and regardless of the class-action deep-level diversity?” could suit. So, what, if anything, go on page 395. Once you should be done with respect to have questions throughout promotions? Second, what, if anything, should Wal-Mart do the chapter, you can quiz about its pay structure for men yourself by using a blank and women? Should it continue piece of paper to cover the its current policy, or should it content. To check yourself, make changes, and if so, what reveal each paragraph after kind? What’s the right thing to do? Finally, what changes does you have answered the Wal-Mart need to make in its corresponding question. organizational structure and company leadership so that these issues aren’t problems in the future? According to Wal-Mart’s CEO, “Diversity doesn’t just happen. Just saying we are committed to diversity is not enough—we must put in place the right systems, processes and leadership to make it happen.” If you were in charge of diversity at Wal-Mart, what would you do?
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Workplace diversity as we know it today is changing. Exhibit 12.1 shows predictions from the 69.3% 70.0% 67.3% U.S. Bureau of the Census of 63.8% 60.1% how the U.S. population will 60.0% 56.3% change over the next 65 years. 52.8% White 49.6% The percentage of white, non50.0% 46.8% Hispanic Americans in the general population is expected to 40.0% decline from 69.3 percent in Hispanic 28.6% 2005 to 46.8 percent by the year 30.0% 26.6% 24.3% 2070. By contrast, the percent21.9% 19.4% age of African Americans will in20.0% 17.0% Black 14.6% 13.3% 13.3% crease (from 12.3 percent to 13.2% 13.2% 13.0% 13.1% 12.8% 12.5% 12.3% 10.6% 10.0% 13.2 percent), as will the 9.8% 8.9% Asian 7.8% 6.7% 5.7% 4.8% percentage of Asian Americans 4.3% Native American 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.0% (from 4.3 percent to 10.6 per2005 2010 2020 2030 2040 2050 2060 2070 cent). Meanwhile the proportion Year of Native Americans will hold steady (at 0.8 percent). The Sources: “Projections of the Resident Population by Race, Hispanic Origin, and Nativity: Middle Series, 2001–2005, fastest-growing group by far, 2006–2010, 2011–2015, 2016–2020, 2025–2045, 2050–2070,” U.S. Census Bureau, [Online] available at http://www.census.gov/population/projections/nation/summary/np-t5-b.txt, ttp://www.census.gov/population/projections/ though, is Hispanics, who are nation/summary/np-t5-c.txt, http://www.census.gov/population/projections/nation/summary/np-t5-e.txt, http://www. expected to increase from 13.3 census.gov/population/projections/nation/summary/np-t5-f.txt, http://www.census.gov/population/projections/nation/ percent of the total population in summary/np-t5-g.txt. 2005 to 28.6 percent by 2070. Exhibit 12.1 Other significant changes have already occurred, as Wal-Mart’s situation in Predicted U.S. Population, the opening case illustrates. For example, today women hold half the jobs in the Distributed by Race, 2005–2070 United States, up from 38.2 percent in 1970.2 Furthermore, white males, who comprised 63.9 percent of the work force in 1950, hold just 38.2 percent of today’s jobs.3 These rather dramatic changes have taken place in a relatively short time. And, as these trends clearly show, the work force of the near future will be increasingly Hispanic, Asian American, African American, and female. It will also be older, as the average “baby boomer” approaches the age of 60 around 2010. Since many boomers are likely to postpone retirement and work well into their 70s to offset predicted reductions in Social Security and Medicare benefits, the work force may become even older than expected.4 This chapter begins with a review of work force diversity—what it is and why it matters. Next, you will learn about two basic dimensions of diversity: surface-level diversity, or how age, gender, race/ethnicity, and mental and physical disabilities affect people at work; and deep-level diversity, or how core personality differences influence behavior and attitudes. In the last section, you will learn how diversity can be managed. Here, you’ll read about diversity paradigms, principles, and practices that help managers strengthen the diversity and the competitiveness of their organizations. Predicted U.S. Population
80.0%
Diversity and Why It Matters diversity A variety of demographic, cultural, and personal differences among an organization’s employees and customers.
Diversity means variety. Therefore, diversity exists in organizations when there is a variety of demographic, cultural, and personal differences among the people who work there and the customers who do business there. For example, step into Longo Toyota in El Monte, California, one of Toyota’s top-selling dealerships, and you’ll find diversity in the form of salespeople who speak Spanish, Korean, Arabic, Vietnamese, Hebrew, and Mandarin Chinese. In fact, the 60
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salespeople at Longo Toyota speak 30 different languages. Surprisingly, this level of diversity was achieved without a formal diversity plan in place.5 By contrast, some companies lack diversity, in their work force, their customers, or both. For example, Denny’s restaurants paid $54.4 million to settle a class-action lawsuit alleging discriminatory treatment of black customers at its restaurants. Edison International, a California-based utility company, paid more than $11 million for wrongly rejecting job applicants on the basis of race. And phone company Bell Atlantic paid a whopping $500 million to African American employees who were unfairly passed over for promotions.6 (Bell Atlantic and GTE have now merged and become Verizon Communications.) Today, however, Denny’s, Edison International, and Verizon have made great improvements in their level of diversity. At Denny’s, all of the company’s charitable contributions now go to organizations that benefit minorities. Furthermore, minorities now comprise 29.1 percent, 28.6 percent, and 24.6 percent of managers at Denny’s, Edison International, and Verizon, respectively, and 47.4 percent, 44.9 percent, and 32 percent, respectively, of their workers.7 In fact, these companies have increased their diversity so much that they consistently make Fortune magazine’s list of the 50 best companies for minorities.8 1
1
After reading the next section, you should be able to describe diversity and explain why it matters.
DIVERSITY: DIFFERENCES THAT MATTER
You’ll begin your exploration of diversity by learning 1.1 that diversity is not affirmative action and 1.2 how to build a business case for diversity.
1.1 Diversity Is Not Affirmative Action
© AP PHOTO/BOB GALBRAITH
A common misconception is that workplace diversity and affirmative action are the same, yet these concepts differ in several critical ways. To start, affirmative action refers to purposeful steps taken by an organization to create employment opportunities for minorities and women.9 By contrast, diversity exists in organizations when there is a variety of demographic, cultural, and personal differences among the people who work there and the customers who do business there. So one key difference is that affirmative action is more narrowly focused on demographics such as gender and race, while diversity has a broader focus that includes demographic, cultural, and personal differences. Furthermore, diversity can exist even if organizations don’t take purposeful steps to create it. For example, as mentioned earlier, Longo Toyota achieved a high level of diversity without having a formal affirmative action program. Likewise, a local restaurant located near a university in a major city is likely to have a more diverse group of employees than one located in a small town. So, organizations can achieve diversity without affirmative action. Likewise, organizations that take affirmative action to create employment opportunities for women and minorities may not yet have diverse work forces. Another important difference is that affirmative action is required by law for private employers with 15 or more employees, while diversity is not. Affirmative action originated with the 1964 Civil Rights Act that bans discrimination in voting, public places, federal government programs, federally supported public education, and employment. Title
affirmative action Purposeful steps taken by an organization to create employment opportunities for minorities and women.
Affirmative action programs are substantially more controversial than diversity programs, but the former are finding some surprising proponents. Members of the group called “Angry White Guys for Affirmative Action” ostensibly support affirmative action because without it, reverse discrimination lawsuits lose some strength. The group publicly opposed California Proposition 209.
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VII of the Civil Rights Act (http://www.eeoc.gov/policy/vii.html) requires that workers have equal employment opportunities when being hired or promoted. More specifically, Title VII prohibits companies from discriminating on the basis of race, color, religion, gender, or national origin. Furthermore, Title VII created the Equal Employment Opportunity Commission, or EEOC (http://www.eeoc.gov), to administer these laws. By contrast, there is no federal law or agency to oversee diversity. Organizations that pursue diversity goals and programs do so voluntarily. For example, Fannie Mae, an organization that makes it easier and cheaper for lower-income families to obtain mortgages for home ownership, has pursued a diverse work force and customer base because, in the words of its former CEO Jim Johnson, doing so is “morally right.”10 Affirmative action programs and diversity programs also have different purposes. The purpose of affirmative action programs is to compensate for past discrimination, which was widespread when legislation was introduced in the 1960s; to prevent ongoing discrimination; and to provide equal opportunities to all, regardless of race, color, religion, gender, or national origin. Organizations that fail to uphold these laws may be required to • • • •
hire, promote, or give back pay to those not hired or promoted; reinstate those who were wrongly terminated; pay attorneys’ fees and court costs for those who bring charges against them; or take other actions that make individuals whole by returning them to the condition or place they would have been had it not been for discrimination.11
Consequently, affirmative action is basically a punitive approach.12 By contrast, as shown in Exhibit 12.2, the general purpose of diversity programs is to create Exhibit 12.2 a positive work environment where no one is advantaged or disadvantaged, General Purpose of Diversity where “we” is everyone, where everyone can do his or her best work, where difPrograms ferences are respected and not ignored, and where everyone feels comfortable.13 So, unlike affirmative action, which punishes companies for not achieving specific gender and race ratios in their work To create a positive work environment where forces, diversity programs seek to benefit both organizations • no one is advantaged or disadvantaged. and their employees by encouraging organizations to value all • “we” is everyone. kinds of differences. Despite affirmative action’s overall success in making • everyone can do his or her best work. workplaces much fairer than they used to be,14 many people • differences are respected and not ignored. argue that some affirmative action programs unconstitution• everyone feels comfortable. ally offer preferential treatment to females and minorities at Source: T. Roosevelt, “From Affirmative Action to Affirming Diversity,” the expense of other employees—a view accepted by some Harvard Business Review 68, no. 2 (1990): 107–117. courts.15 In California, voters approved Proposition 209, which bans race- and gender-based affirmative action in college admissions, government hiring, and government contracting programs. Jake Weiss, a white worker in Jericho, New York, expressed a typical complaint when he said, “It used to be if you were white, you got everything in America and that wasn’t right. But now [with affirmative action], all that’s left for people like me are the crumbs.”16 And Christopher Katzenback, an attorney in a San Francisco law firm, said, “I think people want to be evaluated on their merits, not their race or gender, and that is the driving force behind a lot of this [reverse discrimination] litigation.”17 Furthermore, research shows that people who have gotten a job or promotion as a result of affirmative action are frequently viewed as unqualified, even when clear evidence of their qualifications exists.18 For example, one woman said, “I won a major prize [in my field], and some of the guys in my lab said it was because I was a woman. I’m certain they didn’t choose me because I was a woman. But it gave some disgruntled guys who didn’t get the prize a convenient excuse.”19
Chapter 12: Managing Individuals and a Diverse Work Force
So, while affirmative action programs have created opportunities for minorities and women, those same minorities and women are frequently presumed to be unqualified when others believe they obtained their jobs as a result of affirmative action. In summary, affirmative action and diversity are not the same thing. Not only are they fundamentally different, but they also differ in purpose, practice, and the reactions they produce.
1.2 Diversity Makes Good Business Sense Those who support the idea of diversity in organizations often ignore its business aspects altogether, claiming instead that diversity is simply the “right thing to do.” Yet diversity actually makes good business sense in several ways: cost savings, attracting and retaining talent, and driving business growth.20 Diversity helps companies with cost savings by reducing turnover, decreasing absenteeism, and enabling them to avoid expensive lawsuits. Because of lost productivity and the cost of recruiting and selecting new workers, companies lose substantial amounts of money when employees quit their jobs. In fact, turnover costs typically amount to more than 90 percent of employees’ salaries. By this estimate, if an executive who makes $200,000 leaves the organization will have to spend approximately $180,000 to find a replacement, and even the lowest-paid hourly workers can cost the company as much as $10,000 when they quit. Since turnover rates for African Americans average 40 percent higher than for whites, and since women quit their jobs at twice the rate men do, companies that manage diverse work forces well can cut costs by reducing the turnover rates of these employees.21 And, with women absent from work 60 percent more often than men, primarily because of family responsibilities, diversity programs that address the needs of female workers can also reduce the substantial costs of absenteeism. Diversity programs also save companies money by helping them avoid discrimination lawsuits, which have increased by a factor of 20 since 1970 and quadrupled just since 1995. Indeed, because companies lose two-thirds of all discrimination cases that go to trial, the best strategy from a business perspective is not to be sued for discrimination at all. When companies lose, the average individual settlement amounts to more than $600,000.22 And settlement costs can be substantially higher in class-action lawsuits in which individuals join together to sue a company as a group. For example, Coca-Cola paid $192.5 million to settle a class-action suit brought by 2,200 African American workers who were discriminated against in pay, promotions, and performance reviews; a similar lawsuit brought by 1,300 African American workers cost Texaco $176 million.23 Boeing paid $72.5 million to settle a gender discrimination lawsuit with female employees who were paid less and not promoted because they were women.24 Finally, Dial Corporation, the soap manufacturer, paid $10 million to settle a sexual harassment lawsuit filed by 90 female employees at its manufacturing plants.25 In fact, the average class-action lawsuit costs companies $58.9 million for racial discrimination and $24.9 million for gender discrimination.26 According to the EEOC, companies paid $420 million in damages in 2004 for discrimination lawsuits.27 Diversity also makes business sense by helping companies attract and retain talented workers.28 Indeed, diversity-friendly companies tend to attract better and more diverse job applicants. Very simply, diversity begets more diversity. Companies that make Fortune magazine’s list of the 50 best companies for minorities already attract a diverse and talented pool of job applicants. But, after being recognized by Fortune for their efforts, they experience even bigger increases in both the quality and the diversity of people who apply for jobs. Indeed, research shows that companies with acclaimed diversity programs
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not only attract more talented workers, but also have higher stock market performance.29 Just as important, however, is that these companies also create opportunities that encourage workers to stay. For example, Anne Shen Smith, vice president of support services for Pacific Enterprises, a California-based utility holding company, said that the company created opportunities by replacing the “old boy network,” in which only bosses could nominate employees for promotions, with a program called “Readiness for Management,” in which employees nominate themselves. Workers begin the process by taking a number of selfassessment tests to determine their strengths and weaknesses. Then they take training courses to improve their skills and knowledge. The Readiness for Management program works because it gives people who were previously overlooked a chance to move up and makes employees responsible for improving their skills and knowledge.30 Employees who don’t take that responsibility don’t get promoted. The third way that diversity makes business sense is by driving business growth. Diversity helps companies grow by improving their understanding of the marketplace. When companies have diverse work forces, they are better able to understand the needs of their increasingly diverse customer bases. For example, in the United States today 36 million African Americans, 41 million Hispanic Americans, 12 million Asian Americans, and 20 million gays and lesbians have respective total annual purchasing power of $723 billion, $686 billion, $363 billion, and $610 billion!31 Indeed, according to the U.S. secretary of commerce, “America’s population will increase 50 percent over the next 50 years, with almost 90 percent of that increase in the minority community.”32 Accordingly, the U.S. Department of Commerce expects minority purchasing power to at least triple during that time.33 Companies such as SBC Communications are already taking note, trying to match the diversity of their work force to the diversity of their customer base.34 William Howell, former chairman of JCPenney, said, “If we don’t have people of diverse backgrounds in the back, how in the world can we satisfy the diversity of people coming in through the front door?”35 In fact, a survey of 34 U.S. multinational organizations found that tapping into “diverse customers and markets” was the number one reason managers gave for implementing diversity programs.36 Diversity also helps companies grow through higher-quality problem solving. Though diverse groups initially have more difficulty working together than homogeneous groups, after several months diverse groups do a better job of identifying problems and generating alternative solutions, the two most important steps in problem solving.37 Ernest Drew, former CEO of Hoechst Celanese, a chemical company, recalled a company conference in which the company’s top 125 managers, mostly white males, were joined by 50 lower-level employees, mostly minorities and women. Problem-solving teams were formed to discuss how the company’s corporate culture affected business and how it could be changed. Half the teams were composed of white males, while the other half were of mixed gender and race. Drew said, “It was so obvious that the diverse teams had the broader solutions. They had ideas I hadn’t even thought of. For the first time, we realized that diversity is a strength as it relates to problem solving. Before, we just thought of diversity as the total number of minorities and women in the company, like affirmative action. Now we knew we needed diversity at every level of the company where decisions are made.”38 In short, says Virginia Clarke, of Spencer Stuart, an executive search firm, “There is a strong business case [for diversity] now.”39
Review 1: Diversity: Differences That Matter Diversity exists in organizations when there is a variety of demographic, cultural, and personal differences among the people who work there and the customers who do business there. A common misconception is that workplace
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diversity and affirmative action are the same. However, affirmative action is more narrowly focused on demographics, is required by Surface-Level Diversity law, and is used to punish companies that discriminate on the basis Age of race, color, religion, gender, or national origin. By contrast, diversity is broader in focus (going beyond demographics), voluntary, Personality Attitudes more positive in that it encourages companies to value all kinds of Physical Gender differences, and, at this time, substantially less controversial than Capabilities Deep-Level Diversity affirmative action. Thus, affirmative action and diversity differ in Values/Beliefs purpose, practice, and the reactions they produce. Diversity also Race/ makes good business sense in terms of cost savings (reducing Ethnicity turnover, decreasing absenteeism, and avoiding lawsuits), attracting and retaining talent, and driving business growth (improving marketplace understanding and promoting higher-quality problem solving). Exhibit 12.3 Surface- and Deep-Level Diversity
Diversity and Individual Differences A survey that asked managers, “What is meant by diversity to decision-makers in your organization?” found that they most frequently mentioned race, culture, gender, national origin, age, religion, and regional origin.40 When managers describe workers this way, they are focusing on surface-level diversity. Surfacelevel diversity, as illustrated in Exhibit 12.3, consists of differences that are immediately observable, typically unchangeable, and easy to measure.41 In other words, independent observers can usually agree on dimensions of surfacelevel diversity, such as another person’s age, gender, race/ethnicity, or physical capabilities. And while most people start by using easily observable characteristics, such as surface-level diversity, to categorize or stereotype other people, those initial, surface-level categorizations typically give way to deeper impressions formed from knowledge of others’ behavior and psychological characteristics, such as personality and attitudes.42 When you think of others this way, you are focusing on deep-level diversity. Deep-level diversity consists of differences that are communicated through verbal and nonverbal behaviors and are learned only through extended interaction with others.43 Examples of deep-level diversity include personality differences, attitudes, beliefs, and values. In other words, as people in diverse workplaces get to know each other, the initial focus on surface-level differences such as age, race/ethnicity, gender, and physical capabilities is replaced by deeper, more accurate knowledge of coworkers. If managed properly, the shift from surface- to deep-level diversity can accomplish two things.44 First, coming to know and understand each other better can result in reduced prejudice and conflict. Second, it can lead to stronger social integration. Social integration is the degree to which group members are psychologically attracted to working with each other to accomplish a common objective, or, as one manager put it, “working together to get the job done.” 2 3
2
After reading the next two sections, you should be able to understand the special challenges that the dimensions of surface-level diversity pose for managers. explain how the dimensions of deep-level diversity affect individual behavior and interactions in the workplace.
SURFACE-LEVEL DIVERSITY
Because age, gender, race/ethnicity, and disabilities are usually immediately observable, many managers and workers use these dimensions of surface-level diversity to form initial impressions and categorizations of coworkers, bosses, customers, or job applicants. Whether intentionally or not, sometimes those
surface-level diversity Differences such as age, gender, race/ethnicity, and physical disabilities that are observable, typically unchangeable, and easy to measure.
deep-level diversity Differences such as personality and attitudes that are communicated through verbal and nonverbal behaviors and are learned only through extended interaction with others.
social integration The degree to which group members are psychologically attracted to working with each other to accomplish a common objective.
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initial categorizations and impressions lead to decisions or behaviors that discriminate. Consequently, these dimensions of surface-level diversity pose special challenges for managers who are trying to create positive work environments where everyone feels comfortable and no one is advantaged or disadvantaged. Let’s learn more about those challenges and the ways that 2.1 age, 2.2 gender, 2.3 race/ethnicity, and 2.4 mental or physical disabilities can affect decisions and behaviors in organizations.
2.1 Age age discrimination Treating people differently (e.g., in hiring and firing, promotion, and compensation decisions) because of their age.
Age discrimination is treating people differently (e.g., in hiring and firing, promotion, and compensation decisions) because of their age. The victims of age discrimination are almost always “older” workers, based on the idea that “You can’t teach an old dog new tricks.” It’s commonly believed that older workers can’t learn how to use computers and technology, won’t adapt to change, are sick more often, and, in general, are much more expensive to employ than younger workers. One manager explained his preference for younger workers over older workers this way: “The way I look at it, for $40,000 or $50,000, I can get a smart, raw kid right out of undergrad who’s going to work seven days a week for me for the next two years. I’ll train him the way I want him, he’ll grow with me, and I’ll pay him long-term options so I own him, for lack of a better word. He’ll do exactly what I want—and if he doesn’t, I’ll fire him. . . . The alternative is to pay twice as much for some 40-year-old who does half the amount of work, has been trained improperly, and doesn’t listen to what I say.”45 Unfortunately, attitudes like this are all too common.46 According to the Society for Human Resource Management, 53 percent of 428 surveyed managers believed that older workers “didn’t keep up with technology,” and 28 percent said that older workers were “less flexible.”47 For example, when 57-year old Sam Horgan, a former chief financial officer, was interviewing for a job, he was asked by a 30-something job interviewer, “Would you have trouble working with young bright people?”48 Not surprisingly, 80 percent of human resource managers surveyed by Personnel Management magazine said that age discrimination was a major problem in their organizations and that older employees were not receiving the same training and promotional opportunities as younger workers.49 Likewise, two-thirds of 10,000 people surveyed by AARP (American Association of Retired Persons) felt that they had been wrongly discharged from a job because of their age. In fact, a study by the Society for Human Resource Management found that 20 percent of all companies had been sued for age discrimination in the preceding five years.50 Normally, somewhere between 17,000 and 20,000 age discrimination cases are filed with the EEOC each year.51 And these numbers may increase, given a U.S. Supreme Court ruling that employees may sue for age discrimination even if the discrimination was not intentional (see Chapter 11’s discussion of disparate treatment and adverse impact).52 So, what’s reality and what’s myth? Do older employees actually cost more? In some ways, they do. The older people are and the longer they stay with a company, the more the company pays for salaries, pension plans, and vacation time. But older workers cost companies less, too, because they show better judgment, care more about the quality of their work, and are less likely to quit, show up late, or be absent, the cost of which can be substantial.53 A survey by Chicago outplacement firm Challenger, Gray & Christmas found that only 3 percent of employees age 50 or over changed jobs in any given year compared to 10 percent of the entire work force and 12 percent of workers ages 25 to 34. The study also found that while older workers make up about 14 percent of the work force, they suffer only 10 percent of all workplace injuries and use fewer
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health-care benefits than younger workers with school-age children.54 As for the widespread belief that job performance declines with age, the scientific evidence clearly refutes this stereotype. Performance does not decline with age, regardless of the type of job.55 What can companies do to reduce age discrimination?56 To start, managers need to recognize that age discrimination is much more pervasive than they probably think. Whereas “old” used to mean mid-50s, in today’s workplace, “old” is closer to 40. When 773 CEOs were asked, “At what age does a worker’s productivity peak?” the average age they gave was 43. Thus, age discrimination may be affecting more workers because perceptions about age have changed. In addition, with the aging of the baby boomers, age discrimination is more likely to occur simply because there are millions more older workers than there used to be. And, because studies show that interviewers rate younger job candidates as more qualified (even when they aren’t), companies need to train managers and recruiters to make hiring and promotion decisions on the basis of qualifications, not age. Companies also need to monitor the extent to which older workers receive training. The Bureau of Labor Statistics found that the number of training courses and number of hours spent in training drops dramatically after employees reach the age of 44.57 Finally, companies need to ensure that younger and older workers interact with each other. One study found that younger workers generally hold positive views of older workers and that the more time they spent working with older coworkers, the more positive their attitudes became.58
2.2 Gender Gender discrimination occurs when people are treated differently because of their gender discrimination gender. Gender discrimination and racial/ethnic discrimination (discussed in the Treating people differently because of next section) are often associated with the so-called glass ceiling, the invisible their gender. barrier that prevents women and minorities from advancing to the top jobs in glass ceiling organizations. The invisible barrier that prevents To what extent do women face gender discrimination in the workplace? In women and minorities from advancing some ways, there is much less gender discrimination than there used to be. For to the top jobs in organizations. example, whereas women held only 17 percent of managerial jobs in 1972, today they now outnumber men with 50.6 percent of managerial jobs, a number that is nearly equal to the percentage of women in the work force.59 Likewise, women own 47 percent of all U.S. businesses.60 Whereas women owned 700,000 businesses in 1977 and 4.1 million businesses in 1987, today they own 9 million!61 Finally, though women still earn less than men on average, the differen- Exhibit 12.4 tial is narrowing. As Exhibit 12.4 shows, women earned 79.5 percent of what Women’s Earnings as a Percentage of Men’s men did in 2003, up from 63 percent in 1979. Although progress is being made, gender discriminaWeekly tion continues to operate via the glass ceiling at higher lev- 85% els in organizations. For instance, as shown in Exhibit 12.5, in 2002/2003 a woman had the highest salary (i.e., 80% was the top earner) in only 5.2 percent of Fortune 500 companies, and only 15.7 percent of corporate officers 75% (i.e., top management) were women. Indeed, only 9 of the 70% 500 largest companies in the United States have women CEOs.62 Similarly, only 13.6 percent of the members of 65% corporate boards of directors were women.63 Is gender discrimination the sole reason for the slow 60%1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 rate at which women have been promoted to middle and upper levels of management and corporate boards? Some Sources: “Highlights of Women’s Earnings in 2001, 2002, 2003,” U.S. Department of Labor, Bureau of Labor Statistics, [Online] available at studies indicate that it’s not.64 In some instances, the slow http://www.bls.gov/cps/cpswom2001.pdf and http://www.bls.gov/opub/ted/ progress appears to be due to career and job choices. 2004/oct/wk4/art01.htm, 25 May 2005.
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Whereas men’s career and job choices are often driven by the search for higher pay and ad2002/2003 5.2% vancement, women are more likely to choose Top 2000 4.1% Earners jobs or careers that also give them a greater 1995 1.2% sense of accomplishment, more control over their work schedules, and easier movement in and out of the workplace.65 Furthermore, 15.7% Corporate women are historically much more likely than 12.5% Officers men to prioritize family over work at some 8.7% time in their careers. For example, 96 percent of 600 female Harvard MBAs, held jobs while 13.6% Boards in their twenties. That dropped to 71 percent 11.7% of in their late thirties when they had children, Directors 9.5% but then increased to 82.5 percent in their late forties as their children became older.66 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Beyond these reasons, however, it’s likely that gender discrimination does play a major Sources: “Census of Women Corporate Officers and Top Earners” Catalyst, [Online] available at role in women’s slow progress into the higher http://www.catalystwomen.org/knowledge/titles/title.php? page=cen WOTE02, 26 May 2005; “2003 levels of management. And even if you don’t Catalyst Census of Women Board Directors of the Fortune 1000,” Catalyst, [Online] available at http://www.catalystwomen.org/knowledge/titles/title.php?page=cen_WBD03, 26 May 2005. think so, many of the women you work with probably do. Indeed, one study found that Exhibit 12.5 more than 90 percent of executive women believed that the glass ceiling had Women at Fortune 500 and 1000 Companies hurt their careers.67 In another study, 80 percent of women said they left their last organization because the glass ceiling had limited their chances for advancement.68 A third study indicated that the glass ceiling is prompting more and more women to leave companies to start their own businesses.69 Anita Borg, a senior researcher at a Fortune 500 company, summed up the frustrations of many professional women when she said, “You run into subtle sexism every day. It’s like water torture. It wears you down.”70 What can companies do to make sure that women have the same opportunities for development and advancement as men? One strategy is mentoring, or pairing promising female executives with senior executives with whom they can talk and seek advice and support. A vice president at a utility company said, “I think it’s the single most critical piece to women advancing career-wise. In my experience you need somebody to help guide you and . . . go to bat for you.”71 In fact, 91 percent of female executives have a mentor at some point and feel their mentor was critical to their advancement. Another strategy is to make sure that male-dominated social activities don’t unintentionally exclude women. Nearly half (47 percent) of women in the work force believe that “exclusion from informal networks” makes it more difficult to advance their careers. By contrast, just 18 percent of CEOs thought this was a problem.72 One final strategy is to designate a “go-to person,” other than their supervisors, that women can talk to if they believe that they are being held back or discriminated against because of their gender. Make sure this person has the knowledge and authority to conduct a fair, confidential internal investigation.73
2.3 Race/Ethnicity racial and ethnic discrimination
Racial and ethnic discrimination occurs when people are treated differently because
Treating people differently because of their race or ethnicity.
of their race or ethnicity. To what extent is racial and ethnic discrimination a factor in the workplace? Thanks to the 1964 Civil Rights Act and Title VII, there is much less racial and ethnic discrimination than there used to be. For example, 18 Fortune 500 firms had an African American or Hispanic CEO in 2005, whereas none did in 1988.74 Nonetheless, strong racial and ethnic disparities still exist. For instance, whereas about 12 percent of Americans are black, only 5.9 percent of managers and 3.2 percent of top managers are black.
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Similarly, about 13 percent of Americans are Hispanic, but only 6.3 percent are managers and 3.7 percent are CEOs. By contrast, Asians, who constitute about 4 percent of the population, are better represented holding 4 percent of management jobs and 3.4 percent of CEO jobs.75 What accounts for the disparities between the percentages of minority groups in the general population and their smaller representation in management positions? Some studies have found that the disparities are due to preexisting differences in training, education, and skills and that when African Americans, Hispanics, Asian Americans, and whites have similar skills, training, and education, they are much more likely to have similar jobs and salaries.76 Other studies, however, provide increasingly strong direct evidence of racial or ethnic discrimination in the workplace. For example, one study directly tested hiring discrimination by sending pairs of black and white males and pairs of Hispanic and non-Hispanic males to apply for the same jobs. Each pair had résumés with identical qualifications, and all were trained to present themselves in similar ways to minimize differences during interviews. The researchers found that the white males got three times as many job offers as the black males, and that the non-Hispanic males got three times as many offers as the Hispanic males.77 Another study, which used similar methods to test hiring procedures at 149 different companies, found that whites received 10 percent more interviews than blacks. Half of the whites interviewed received job offers compared to only 11 percent of the blacks. And when job offers were made, blacks were much more likely to be offered lower-level positions, while whites were more likely to be offered jobs at higher levels than the jobs they had applied for.78 Critics of these studies point out that it’s nearly impossible to train different applicants to give identical responses in job interviews and that differences in interviewing skills may have somehow accounted for the results. However, British researchers found similar kinds of discrimination just by sending letters of inquiry to prospective employers. As in the other studies, the letters were identical except for the applicant’s race. Employers frequently responded to letters from Afro-Caribbean, Indian, or Pakistani “applicants” by indicating that the positions had been filled. By contrast, they often responded to white, Anglo-Saxon “applicants” by inviting them to face-to-face interviews. Similar results were found with Vietnamese and Greek “applicants” in Australia.79 In short, the evidence strongly indicates that there is strong and persistent racial and ethnic discrimination in the hiring processes of many organizations. What can companies do to make sure that people of all racial and ethnic backgrounds have the same opportunities?80 Start by looking at the numbers. Compare the hiring rates of whites to the hiring rates for different racial and ethnic applicants. Do the same thing for promotions within the company. See if nonwhite workers quit the company at higher rates than white workers. Also, survey employees to compare white and nonwhite employees’ satisfaction with jobs, bosses, and the company, as well as their perceptions concerning equal treatment. Next, if the numbers indicate racial or ethnic disparities, consider employing a private firm to test your hiring system by having applicants of different races with identical qualifications apply for jobs in your company.81 Although disparities aren’t proof of discrimination, it’s much better to investigate hiring and promotion disparities yourself than to have the EEOC or a plaintiff’s lawyer do it for you, especially since nearly half of the discrimination charges filed with the EEOC in a recent six-year period were related to race and ethnicity (which the EEOC calls “national origin”).82 Another step is to eliminate unclear selection and promotion criteria. Vague criteria allow decision makers to focus on non-job-related characteristics that may unintentionally lead to employment discrimination. Instead, selection and promotion criteria should spell out the specific knowledge, skills, abilities, education, and experience needed to perform a job well.
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Finally, train managers and others who make hiring and promotion decisions. At Tower Records, the human resources staff assembles on a giant game board that covers a conference room floor. Tower store managers then answer questions about hiring situations. If they answer a question correctly, they move forward on the board. If they answer it incorrectly, they stay in place, and the group discusses what should have been done instead. The number of grievances about hiring procedures has dropped significantly since the training began.83
2.4 Mental or Physical Disabilities
disability A mental or physical impairment that substantially limits one or more major life activities.
disability discrimination Treating people differently because of their disabilities.
Back problems, foot pain, depression, alcoholism, epilepsy, paralysis, AIDS, cancer, learning disabilities, and substantial hearing or visual impairments: What do all these have in common? Each is a disability. According to the Americans with Disabilities Act (http://www.usdoj.gov/crt/ada/adahom1.htm), a disability is a mental or physical impairment that substantially limits one or more major life activities.84 One in every five Americans, or more than 54 million people, has a disability.85 Disability discrimination occurs when people are treated differently because of their disabilities. To what extent is disability discrimination a factor in the workplace? According to the U.S. Census Bureau, 80 percent of able men have jobs, compared to only 60 percent of those with disabilities. For women, the statistic is even lower, with 67 percent of able women being employed versus only 51 percent of disabled women. More specifically, only 47 percent of those who have a sensory disability, 32 percnt of those who have a physical disability, and 28 percent of those who have a mental disability have jobs.86 Furthermore, people with disabilities are disproportionately employed in low-status or parttime jobs, have little chance for advancement, and, on average, are twice as likely to live in poverty as able people.87 Numerous studies also indicate that managers and the general public believe that discrimination against people with disabilities is common and widespread.88 What accounts for the disparities between the employment and income levels of able people and people with disabilities? Contrary to popular opinion, it has nothing to do with the ability of people with disabilities to do their jobs well. Studies show that as long as companies make reasonable accommodations for disabilities (e.g., changing procedures or equipment), people with disabilities perform their jobs just as well as able people. Furthermore, they have better safety records and are not any more likely to be absent or quit their jobs.89 What can companies do to make sure that people with disabilities have the same opportunities as everyone else? Beyond educational efforts to address incorrect stereotypes and expectations, a good place to start is to commit to reasonable workplace accommodations such as changing work schedules, reassigning jobs, acquiring or modifying equipment, or providing assistance when needed. Accommodations for disabilities needn’t be expensive. According to the Job Accommodation Network, 71 percent of accommodations cost employers $500 or less, and 20 percent of accommodations don’t cost anything at all.90 For example, rather than rebuild its offices, the U.S. Postal Service used inexpensive ramps to raise wheelchair-bound clerks to counter level so they could wait on customers. Other examples of low-cost accommodations include a telephone sound amplifier ($48) for a hearing impaired factory worker; a rolodex card system with streets filed alphabetically with ZIP codes ($150) for a learning impaired mail room worker who couldn’t remember which streets had which ZIP codes; lateral filing cabinets ($450 each) for a clerk who couldn’t reach the vertical filing cabinets from her wheelchair; and a personal paging device ($350) that vibrated to let a hearing disabled grocery store worker with Down syndrome who couldn’t hear the public address system know when he was to go
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Physical changes, such as installing a ramp or modifying a workspace or restroom.
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A quieter workspace or other changes that reduce noisy distractions for someone with a mental disability.
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Training and other written materials in an accessible format, such as in Braille, on audio tape, or on computer disk.
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TTYs for use with telephones by people who are deaf, and hardware and software that make computers accessible to people who have vision impairments or who have difficulty using their hands.
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Time off for someone who needs treatment for a disability.
Source: “Americans with Disabilities Act: A Guide for People with Disabilities Seeking Employment,” U.S. Department of Justice, [Online] available at http://www.usdoj.gov/crt/ada/workta.htm, 2 October 2003.
to the store office.91 For further information about reasonable accommodations, contact the Job Accommodation Network (http://janweb.icdi.wvu.edu/), which provides free help and has a database of 26,000 successful accommodations.92 Exhibit 12.6 provides a list of common, inexpensive accommodations that companies can make for disabled workers. Some of the accommodations just described involve assistive technology that gives workers with disabilities the tools they need to overcome their disabilities. Providing workers with assistive technology is also an effective strategy. According to the National Council on Disability, 92 percent of workers with disabilities who use assistive technology report that it helps them work faster and better, 81 percent indicate that it helps them work longer hours, and 67 percent say that it is critical to getting a job.93 To learn about assistive technologies that can help workers with disabilities, see Abledata (http://www.abledata.com/), which lists 25,000 products from 3,000 organizations, or the National Rehabilitation Information Center (http://www.naric.com/), which provides information for specific disabilities. Finally, companies should actively recruit qualified workers with disabilities. Numerous organizations, such as Mainstream, Kidder Resources, the American Council of the Blind (http://www.acb.org/), the National Federation of the Blind (http://www.nfb.org/), the National Association for the Deaf (http://www.nad.org/), the Epilepsy Foundation of America (http:// www.epilepsyfoundation.org/), and the National Amputation Foundation (http://www.nationalamputation.org/), actively work with employers to find jobs for qualified people with disabilities. Companies can also place advertisements in publications, such as Careers and the Disabled, that specifically target workers with disabilities.94
Review 2: Surface-Level Diversity Age, gender, race/ethnicity, and physical and mental disabilities are dimensions of surface-level diversity. Because those dimensions are (usually) easily observed, managers and workers tend to rely on them to form initial impressions and stereotypes. Sometimes this can lead to age, gender, racial/ethnic, or disability discrimination (i.e., treating people differently) in the workplace. In general, older workers, women, people of color or different national origins, and people with disabilities are much less likely to be hired or promoted than white males. This disparity is often due to incorrect beliefs or stereotypes, such as “job performance declines with age,” or “women aren’t willing to travel on business,” or “workers with disabilities aren’t as competent as able workers.” To reduce discrimination, companies can determine the hiring and promotion rates for different groups, train managers to make hiring and promotion decisions on the basis of specific criteria, and make sure that everyone has equal access to training, mentors, reasonable work accommodations, and
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Exhibit 12.6 Reasonable Accommodations for Disabled Workers
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assistive technology. Finally, companies need to designate a “go-to person” that employees can talk to if they believe they have suffered discrimination. 3
DEEP-LEVEL DIVERSITY
© 2003 UNITED PARCEL SERVICE OF AMERICA, INC.
Have you ever taken an instant dislike to someone—perhaps because of the way the person talked, acted, or treated you— only to decide, after spending some time working or interacting with this person, that your initial impressions were wrong and that he or she wasn’t so bad after all? If you’ve had this experience, then you understand the difference between surface- and deep-level diversity. As you just learned, people often use the dimensions of surface-level diversity to form initial impressions about others. Over time, however, as people have a chance to get to know each other, initial impressions based on age, gender, race/ethnicity, and mental or physical disabilities give way to deeper impressions based on behavior and psychological characteristics. When we think of others this way, we are focusing on deep-level diversity. Deep-level diversity represents differences that can be learned only through extended interaction with others. Examples of deep-level diversity include differences in personality, attitudes, beliefs, and values. In short, recognizing deeplevel diversity requires getting to know and understand one another better. And that matters, because it can result in less prejudice, discrimination, and conflict in the workplace. These changes can then lead to better social integration, the degree to which organizational or group members are psychologically attracted to working with each other to accomplish a common objective.
Life experience may well be a point of overlap between surface-level diversity and deep-level diversity. As this ad shows, UPS is proactive in looking beyond even the traditional categories of surface-level diversity. The result is a compassionate business practice that ensures diversity and is socially and ethically responsible.
Let’s examine deep-level diversity by exploring 3.1 the “Big Five” dimensions of personality and 3.2 other significant work-related aspects of personality.
3.1 Big Five Dimensions of Personality
disposition The tendency to respond to situations and events in a predetermined manner.
personality The relatively stable set of behaviors, attitudes, and emotions displayed over time that makes people different from each other.
extraversion The degree to which someone is active, assertive, gregarious, sociable, talkative, and energized by others.
Stop for a second and think about your boss (or the boss you had in your last job). What words would you use to describe him or her? Is your boss introverted or extraverted? Emotionally stable or unstable? Agreeable or disagreeable? Organized or disorganized? Open or closed to new experiences? When you describe your boss or others in this way, what you’re really doing is describing dispositions and personality. A disposition is the tendency to respond to situations and events in a predetermined manner. Personality is the relatively stable set of behaviors, attitudes, and emotions displayed over time that makes people different from each other.95 For example, which of your aunts or uncles is a little offbeat, a little out of the ordinary? What was that aunt or uncle like when you were small? What is she or he like now? Chances are she or he is pretty much the same wacky person. In other words, the person’s core personality hasn’t changed. For years, personality researchers studied thousands of different ways to describe people’s personalities. In the last decade, however, personality research conducted in different cultures, different settings, and different languages has shown that five basic dimensions of personality account for most of the differences in peoples’ behaviors, attitudes, and emotions (or for why your boss is the way he or she is!). The Big Five Personality Dimensions are extraversion, emotional stability, agreeableness, conscientiousness, and openness to experience.96 Extraversion is the degree to which someone is active, assertive, gregarious, sociable, talkative, and energized by others. In contrast to extraverts, introverts
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are less active, prefer to be alone, and are shy, quiet, and reserved. For the best results in the workplace, introverts and extraverts should be correctly matched to their jobs. For example, the Peabody Hotel in Memphis, Tennessee, solved one of its problems by having job applicants complete an introversion/extraversion personality measure. Ken Hamko, a manager at the hotel, explained how this worked: “We had hostesses who wouldn’t stay by the door or greet guests or smile. When we gave them the personality profile, we found they didn’t like being in front of people. So we moved them into other positions and replaced them with extraverts.”97 Emotional stability is the degree to which someone is not angry, depressed, anxious, emotional, insecure, or excitable. People who are emotionally stable respond well to stress. In other words, they can maintain a calm, problemsolving attitude in even the toughest situations (e.g., conflict, hostility, dangerous conditions, or extreme time pressures). By contrast, under only moderately stressful situations, emotionally unstable people find it difficult to handle the most basic demands of their jobs and become distraught, tearful, self-doubting, and anxious. Emotional stability is particularly important for high-stress jobs, such as police work, fire fighting, emergency medical treatment, or piloting planes. John S. Blonsick, a captain with Delta Air Lines, said:
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emotional stability The degree to which someone is not angry, depressed, anxious, emotional, insecure, or excitable.
From the first day of flight training, pilot aspirants are tested for their ability to separate their emotions from their operational environment. The process allows a pilot to erect psychological barriers to avoid distractions in an environment that commands superior mental diligence and responses—an environment in which the decision-making process is conducted at slightly under the speed of sound. . . . Abnormal and emergency situations are handled in a cool and professional manner. Voice-recorder transcripts of accidents invariably read like training manuals, despite the life-threatening situations they depict. Crew members are focused and actively working to correct the situation as they have been trained to do right up to the very last moment before impact.98 As you learned in Chapter 1, emotional stability is also important for managers. Indeed, the number one mistake managers make is intimidating, bullying, and being abrasive to the people who work for them. Agreeableness is the degree to which someone is cooperative, polite, flexible, forgiving, good-natured, tolerant, and trusting. Basically, agreeable people are easy to work with and be around, whereas disagreeable people are distrusting and difficult to work with and be around. A number of companies have made general attitude or agreeableness the most important factor in their hiring decisions. Small business owner Roger Cook says, “Hire nice people. I’m looking for personal—not professional—traits. I want a good or nice person. I can teach the skills. I call their references and ask, ‘Is he or she a nice person?’ I take a close look at how applicants answer questions and carry themselves. Why nice people? Because they’re trustworthy; they get along with other crew members: they are good with customers and they are usually hard workers.”99 Conscientiousness is the degree to which someone is organized, hardworking, responsible, persevering, thorough, and achievement oriented. One management consultant wrote about his experiences with a conscientious employee: He arrived at our first meeting with a typed copy of his daily schedule, a sheet bearing his home and office phone numbers, addresses, and his email address. At his request, we established a timetable for meetings for the next four months. He showed up on time every time, day planner in hand, and carefully listed tasks and due dates. He questioned me exhaustively if he didn’t understand an assignment and returned on schedule with the completed work or with a clear explanation as to why it wasn’t done.100 Openness to experience is the degree to which someone is curious, broadminded, and open to new ideas, things, and experiences; is spontaneous; and
agreeableness The degree to which someone is cooperative, polite, flexible, forgiving, goodnatured, tolerant, and trusting.
conscientiousness The degree to which someone is organized, hardworking, responsible, persevering, thorough, and achievement oriented.
openness to experience The degree to which someone is curious, broad-minded, and open to new ideas, things, and experiences; is spontaneous; and has a high tolerance for ambiguity.
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Conscientiousness: The Organized, Hardworking, Responsible Personality Conscientious people are organized, hardworking, responsible, persevering, thorough, and achievement oriented. Who wouldn’t want to hire people with these personality traits? Indeed, 92 studies across five occupational groups (professionals, police, managers, sales, and skilled/semiskilled jobs) with a combined total of 12,893 study participants indicated that, on average, conscientious people are inherently more motivated and are better at their jobs.
JOB PERFORMANCE
There is a 66 percent chance that conscientious workers will be better at their jobs than less conscientious workers.101 Probability of Success 10%
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has a high tolerance for ambiguity. Most companies need people who are strong in terms of openness to experience to fill certain positions, but for other positions, this dimension is less important. People in marketing, advertising, research, or other creative jobs need to be curious, open to new ideas, and spontaneous. By contrast, openness to experience is not particularly important to accountants, who need to consistently apply stringent rules and formulas to make sense out of complex financial information. Which of the Big Five Personality Dimensions has the largest impact on behavior in organizations? The cumulative results indicate that conscientiousness is related to job performance across five different occupational groups (professionals, police, managers, sales, and skilled or semiskilled jobs).102 In short, people “who are dependable, persistent, goal directed, and organized tend to be higher performers on virtually any job; viewed negatively, those who are careless, irresponsible, low-achievement striving, and impulsive tend to be lower performers on virtually any job.”103 See the What Really Works feature in this chapter for further explanation. The results also indicate that extraversion is related to performance in jobs, such as sales and management, which involve significant interaction with others. In people-intensive jobs like these, it helps to be sociable, assertive, and talkative and to have energy and be able to energize others. Finally, people who are extraverted and open to experience seem to do much better in training. Being curious and open to new experiences, as well as sociable, assertive, talkative, and full of energy, helps people perform better in learning situations.104
3.2 Work-Related Personality Dimensions Does the way you keep your desk reveal something about your personality? Lots of people think so. For example, people with ultra-neat desks tend to
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believe that a desk buried under mounds of paper, food wrappers, and old magazines is a sign that its owner is lazy, disorganized, undependable, and a dreamer. On the other hand, people with messy desks believe that a spotless desk with everything in its place is a sign that its owner is impatient, critical, controlling, analytical, and a perfectionist. Who knows, maybe if your desk is somewhere between “operating-room clean” and the “aftermath of a tornado,” it is a sign that you have a good-natured, flexible, and fun-loving personality.105 Although studies indicate that extraversion, emotional stability, agreeableness, conscientiousness, and openness to experience are the five basic dimensions of personality in any culture, setting, or language, research has also identified additional personality dimensions that directly affect workplace attitudes and behaviors. These additional personality dimensions are authoritarianism, Machiavellian tendencies, Type A/B personality, locus of control, and positive/negative affectivity. Authoritarianism is the extent to which an individual believes there should be power and status differences within the organization.106 Authoritarian employees are likely to prefer a direct leadership style, in which the boss tells them exactly what to do. While this sounds desirable, one disadvantage is that even when they know a better solution or are aware of problems, authoritarian employees may simply carry out their boss’s orders without question. Also, authoritarian employees may not perform well on ambiguous tasks or for managers who encourage employees to use their own initiative and judgment. Authoritarian leaders are highly demanding and expect employees to unquestioningly obey their orders. T. J. Rodgers, CEO of Cypress Semiconductor, is considered Silicon Valley’s toughest boss. Rodgers starts every meeting with a complaint, for example, noting at a recent meeting that a competitor had achieved 98 percent on-time deliveries and was “kicking our a**.” When he feared that good employees would be hired away by competitors, he ordered his managers to take stock options away from poor performers and give them to his best ones. Said Rodgers, “I’m more concerned about stars not getting enough stock than I am about turkeys not getting any.” And, consistent with his authoritarian style, Rodgers’s office contains a replica of an aircraft bomb labeled with the names of Cypress’s competitors.107 People with Machiavellian personalities believe that virtually any type of behavior is acceptable if it helps satisfy needs or accomplish goals.108 In other words, people with Machiavellian personalities believe that the ends justify the means. For example, “high Machs” are generally more willing to use lies and deceit to get their way than are “low Machs,” even in high-pressure situations where the chances of being caught in a lie are high.109 High Machs believe that most people are gullible and can be manipulated. High Machs are also more effective at persuading others than are low Machs and tend to be resistant to others’ efforts to persuade them.110 One reason high Machs are more effective at persuading others is that low Machs (meaning most people) may be distracted by emotions or issues unrelated to winning. By contrast, high Machs are difficult to persuade because they ignore emotions and secondary issues and focus only on the things that move them closer to their goals. Also, because they are out for themselves and no one else, high Machs don’t do well in work teams. High Machs often cause conflicts within teams and sometimes cause teams to break up. The Wall Street Journal offers this vivid description of High Machs: “They tend to be narcissistic, arrogant, manipulative and goal-oriented. They trust no one and refuse to collaborate. They lack a capacity for empathy but are skilled at politics. Though they purposely disregard how they’re coming off to colleagues or subordinates, they’re often very good at sweet-talking bosses, who remain oblivious to their dastardly ways.”111 The Type A/B personality dimension is the extent to which people tend toward impatience, hurriedness, competitiveness, and hostility.112 Type A personalities try
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authoritarianism The extent to which an individual believes there should be power and status differences within organizations.
Machiavellian The extent to which individuals believe that virtually any type of behavior is acceptable in trying to satisfy their needs or meet their goals.
Type A/B personality dimension The extent to which people tend toward impatience, hurriedness, competitiveness, and hostility.
Type A personality A person who tries to complete as many tasks as possible in the shortest possible time and is hard driving, competitive, impatient, perfectionistic, angry, and unable to relax.
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Type B personality A person who is relaxed, easygoing, and able to engage in leisure activities without worrying about work.
locus of control The degree to which individuals believe that their actions can influence what happens to them.
internal locus of control The belief that what happens to you is largely the result of your own actions.
external locus of control The belief that what happens to you is largely the result of factors beyond your control.
to complete as many tasks as possible in the shortest possible time and are hard driving, competitive, impatient, perfectionistic, angry, and unable to relax.113 Type A’s have a high need for achievement and are also likely to be aggressive, self-confident, dominant, and extraverted. In contrast, Type B personalities are easygoing, patient, and able to relax and engage in leisure activities. Unlike Type A personalities, they are neither highly competitive nor excessively driven to accomplishment. What do we know about the Type A/B personality dimension and the workplace? Contrary to what you’d expect, Type A’s don’t always outperform Type B’s on the job. Type A’s tend to perform better on tasks that demand quick decisions made at a rapid work pace under time pressure, but Type B’s tend to perform better at tasks requiring well-thought-out decisions when there is little time pressure. And despite their ambition to succeed, top managers are much more likely to have Type B personalities than Type A personalities.114 Ironically, the task complexity and psychological challenge inherent in management jobs actually work against many Type A managers by dramatically increasing their stress levels.115 Type B’s, on the other hand, do a much better job of handling and responding to the stress of managerial jobs. The Type A/B personality dimension is also known for its well-established link to heart attacks.116 However, it is the hostility and anger of Type A personalities that increase the risk of heart attack, not their impatience, hurriedness, or competitiveness. For example, businessperson Matt Sicinski gets extremely hostile and angry when his coworkers miss deadlines or don’t follow directions. Says Sicinski, “My feet get cold, and I get a throbbing in my head. I can feel every muscle in my body tense up.” If he gets angry with someone on the phone, sometimes, he presses the mute button so he can’t be heard and begins “cursing somebody up one side and down the other.”117 How dangerous is angry, hostile behavior to your health? A long-term study at Duke University followed a group of lawyers for 25 years and found that those with higher hostility scores were 4.2 times as likely to have died over that period as those with low scores.118 This does not bode well for Sicinski, who at age 30 already has dangerously high blood pressure, which he admits is not responding well to his blood pressure medications. You do poorly on an exam. Quick! Who do you blame, yourself or the professor? The answer to that question may, to some extent, indicate whether you have an internal or external locus of control. Locus of control is the degree to which people believe that their actions influence what happens to them. Internal locus of control is the belief that what happens to you is largely under your control. Therefore, students with an internal locus of control are more likely to hold themselves accountable for their exam performance (“I studied the wrong material” or “I didn’t study enough.”). Besides believing that what happens to them is largely under their control, internals are also easier to motivate (especially when rewards are linked to performance), more difficult to lead, more independent, and better able to handle complex information and solve complex problems.119 In contrast, an external locus of control is the belief that what happens to you is primarily due to factors beyond your control, such as luck, chance, or other powerful people.120 Therefore, students with an external locus of control are more likely to attribute their poor exam performance to luck (“If only it had been an essay exam instead of multiple choice”), chance (“I didn’t get enough sleep”), or the professor (a powerful person). In general, externals are more compliant and conforming and therefore are easier to lead than internals. For example, internals may question directives from their managers, while externals are likely to quietly accept them. Finally, internals are likely to perform better on complex tasks that require initiative and independent decision making, whereas externals tend to perform better on simple, repetitive tasks that are well structured.
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Affectivity is the stable tendency to experience positive or negative moods and to react to things in a generally positive or negative way.121 People with positive affectivity consistently notice and focus on the positive aspects of themselves and their environments. In other words, they seem to be in a good mood most of the time and are predisposed to being optimistic, cheerful, and cordial. By contrast, people with negative affectivity consistently notice and focus on the negative in themselves and their environments. They are frequently in bad moods, consistently expect the worst to happen, and are often irritated or pessimistic. How stable are the positive or negative moods associated with positive/negative affectivity? A 10-year study by the National Institute of Aging found that even when people changed jobs or companies, the people who were the happiest at the beginning of the study were still the happiest at the end of the study 10 years later.122 Likewise, a much longer study found that high school counselors’ ratings of student cheerfulness predicted how satisfied these people were with their jobs 30 years later.123 Since dispositions toward positive or negative affectivity are long lasting and very stable, some companies have begun measuring affectivity during the hiring process. Elsie Houck, who oversees 1,200 employees at 72 bank centers for Bank One Dallas, said, “The biggest thing we’re focusing on in this market is customer service. We want to make sure that we’re really providing world-class service to our customers so we can retain them. My motto when we’re hiring employees is, we’ve got to hire the right people in the right job. We look for people with a twinkle in their eye, a spring in their step, and a smile in their voice. It’s important that they have a positive attitude [and are] filled with high energy and enthusiasm. If they have those qualities, we’re going to provide worldclass service to our customers.”124 Studies also show that employees with positive affectivity are absent less often, report feeling less stress, are less likely to be injured in workplace accidents, and are less likely to retaliate against management and the company when they believe that they have been treated unfairly.125 Affectivity is also important because of mood linkage, a phenomenon in which one worker’s negative affectivity and bad moods can spread to others. Studies of nurses and accountants show a strong relationship between individual workers’ moods and the moods of their coworkers.126 Finally, people with positive affectivity are better decision makers, are rated as having much higher managerial potential, and are more successful in sales jobs.127
Review 3: Deep-Level Diversity Deep-level diversity matters because it can reduce prejudice, discrimination, and conflict while increasing social integration. It consists of dispositional and personality differences that can be learned only through extended interaction with others. Research conducted in different cultures, settings, and languages indicates that there are five basic dimensions of personality: extraversion, emotional stability, agreeableness, conscientiousness, and openness to experience. Of these, conscientiousness is perhaps the most important because conscientious workers tend to be better performers on virtually any job. Extraversion is also related to performance in jobs that require significant interaction with others. Studies also show that the personality dimensions of authoritarianism, Machiavellian tendencies, Type A/B personality, locus of control, and positive/negative affectivity are important in the workplace. These personality dimensions are related to honesty, trust, teamwork, persuasive abilities, job performance, decision making, stress, heart disease, adaptability, promotions, interpersonal skills, motivation, initiative, job satisfaction, absenteeism, accidents, retaliatory behavior, mood linkage, and management potential.
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affectivity The stable tendency to experience positive or negative moods and to react to things in a generally positive or negative way.
positive affectivity A personality trait in which individuals tend to notice and focus on the positive aspects of themselves and their environments.
negative affectivity A personality trait in which individuals tend to notice and focus on the negative aspects of themselves and their environments.
mood linkage A phenomenon in which one worker’s negative affectivity and bad moods can spread to others.
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How Can Diversity Be Managed? How much should companies change their standard business practices to accommodate the diversity of their workers? For example, at Whirlpool Corporation’s Lavergne, Tennessee appliance factory, 10 percent of the work force is Muslim. Many Muslim men have long beards and wear skullcaps, while Muslim women wear flowing headscarves and modest, loose-fitting, form-hiding clothes. For safety reasons, long hair, hats of any kind, and loose clothing are prohibited on the factory floor. (Imagine any of these getting caught in moving machinery.) How should Whirlpool’s managers deal with the obvious conflict between the Muslim religious practices and the company’s safety procedures that are designed to prevent injury? Furthermore, at noon on Fridays, all Muslims attend 45- to 90-minute religious services at their mosques. With a typical Monday to Friday workweek and lunch breaks of just 30 minutes, how can Whirlpool’s managers accommodate this Friday service without hurting the production schedule and without giving the Muslims special treatment (that may be resented by the 90 percent of workers who aren’t Muslim)?128 Likewise, what do you do when a talented top executive has a drinking problem that only seems to affect his behavior at company business parties (for entertaining clients), where he has made inappropriate advances toward female employees? What do you do when, despite aggressive company policies against racial discrimination, employees continue to tell racial jokes and publicly post cartoons displaying racial humor? And, since many people confuse diversity with affirmative action, what do you do to make sure that your company’s diversity practices and policies are viewed as benefiting all workers and not just some workers? No doubt about it, questions like these make managing diversity one of the toughest challenges that managers face.129 Nonetheless, there are steps companies can take to begin to address these issues. 4
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After reading the next section, you should be able to explain the basic principles and practices that can be used to manage diversity.
MANAGING DIVERSITY
As discussed earlier, diversity programs try to create a positive work environment where no one is advantaged or disadvantaged, where “we” is everyone, where everyone can do his or her best work, where differences are respected and not ignored, and where everyone feels comfortable. Let’s begin to address those goals by learning about 4.1 different diversity paradigms, 4.2 diversity principles, and 4.3 diversity training and practices.
4.1 Diversity Paradigms As shown in Exhibit 12.7, there are several different methods or paradigms for managing diversity: the discrimination and fairness paradigm, the access and legitimacy paradigm, and the learning and effectiveness paradigm.130 The discrimination and fairness paradigm, which is the most common method of approaching diversity, focuses on equal opportunity, fair treatment, recruitment of minorities, and strict compliance with the equal employment opportunity laws. Under this approach, success is usually measured by how well companies achieve recruitment, promotion, and retention goals for women, people of different racial/ethnic backgrounds, or other underrepresented groups. For example, one manager said, “I do know that if you don’t measure something, it doesn’t count. You measure your market share. You measure your profitability. The same should be true for diversity. There has to be some way of measuring
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DIVERSITY PARADIGM
FOCUS
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SUCCESS MEASURED BY
BENEFITS
LIMITATIONS
Discrimination & Fairness
Equal opportunity Fair treatment Recruitment of minorities Strict compliance with laws
Recruitment, promotion, and retention goals for underrepresented group
Fairer treatment Increased demographic diversity
Focus on surface-level diversity
Access & Legitimacy
Acceptance and celebration of differences
Diversity in company matches diversity of primary stakeholders
Establishes a clear business reason for diversity
Focus on surface-level diversity
Learning & Effectiveness
Integrating deeplevel differences into organization
Valuing people on the basis of individual knowledge, skills, and abilities
Values common ground Distinction between individual and group differences Less conflict, backlash, and divisiveness Bringing different talents and perspectives together
Focus on deep-level diversity is more difficult to measure and quantify
Exhibit 12.7
AP PHOTO/BEBETO MATTHEWS
whether you did, in fact, cast your net widely, and whether the company is better off today in terms of the experience of people of color than it was a few years ago. I measure my market share and my profitability. Why not this?”131 The primary benefit of the discrimination and fairness paradigm is that it generally brings about fairer treatment of employees and increases demographic diversity. The primary limitation is that the focus of diversity remains on the surface-level diversity dimensions of gender, race, and ethnicity. The access and legitimacy paradigm focuses on the acceptance and celebration of differences to ensure that the diversity within the company matches the diversity found among primary stakeholders, such as customers, suppliers, and local communities. This is similar to the business growth advantage of diversity discussed earlier in the chapter. The basic idea behind this approach is “We are living in an increasingly multicultural country, and new ethnic groups are quickly gaining consumer power. Our company needs a demographically more diverse work force to help us gain access to these differentiated segments.”132 Consistent with this goal, Ed Adams, vice president of human resources for Enterprise Rent-a-Car said, “We want people who speak the same language, literally and figuratively, as our customers. We don’t set quotas. We say [to our managers], ‘Reflect your local market.’”133 The primary benefit of this approach is that it establishes a clear business reason for diversity. Like the discrimination and fairness paradigm, however, it focuses only on the surface-level diversity dimensions of gender, race, and ethnicity. Furthermore, employees who are assigned responsibility for customers and stakeholders on the basis of their gender, race, or ethnicity may eventually feel frustrated and exploited. While the discrimination and fairness paradigm focuses on assimilation (having a demographically representative work force), and the access and
Paradigms for Managing Diversity
Amric Singh, center, who was fired from his job as a New York City policeman, and Pardeep Sing Nagra, left, an officer with Peel Regional Police in Ontario, Canada, listen as Arvinder Singh Sandhu, an officer with the Ontario Regional Police, Canada, speaks at a news conference in New York City. Sikh police officers from Great Britain and Canada joined Amric Singh at his announcement of a lawsuit in U.S. District Court in Manhattan against the New York police department, Commissioner Ray Kelly, and the city, claiming religious discrimination after he was fired.
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legitimacy paradigm focuses on differentiation (having demographic differences inside the company match those of key customers and stakeholders), the learning and effectiveness paradigm focuses on integrating deep-level organizational plurality diversity differences, such as personality, attitudes, beliefs, and values, into A work environment where (1) all the actual work of the organization. Under this approach, people are valued members are empowered to contribute not only on the basis of surface-level diversity (i.e., gender, race/ethnicity), but in a way that maximizes the benefits to also for all of their knowledge, skills, abilities, and experiences. For example, the organization, customers, and Bedie Kohake didn’t become a plant manager for Catalytica Pharmaceuticals, themselves, and (2) the individuality of each member is respected by which makes Sudafed for Warner-Lambert and the HIV drug AZT for Glaxonot segmenting or polarizing people SmithKline, because she’s female. She got the job because she graduated on the basis of their membership in a summa cum laude with a degree in chemical engineering and had a decade of particular group. experience working in manufacturing facilities for companies like DuPont Exhibit 12.8 Chemical, where she managed to increased production by 60 percent. Creating a Learning and Kohake, who manages 10 production areas and 100 workers, technicians, and Effectiveness Diversity Paradigm in chemical engineers, says, “I’ve never had any disadvantage here, because an Organization Catalytica practices diversity.”134 Exhibit 12.8 shows the necessary preconditions for 1. The leadership must understand that a diverse work force creating a learning and effectiveness diversity will embody different perspectives and approaches to work, paradigm within an organization. and must truly value variety of opinion and insight. In other words, the learning and effectiveness paradigm is consistent with achieving or2. The leadership must recognize both the learning ganizational plurality. Organizational plurality is opportunities and the challenges that the expression of a work environment where (1) all members different perspectives presents for an organization. are empowered to contribute in a way that 3. The organizational culture must create an expectation of maximizes the benefits to the organization, high standards of performance for everyone. customers, and themselves, and (2) the indi4. The organizational culture must stimulate personal viduality of each member is respected by not development. segmenting or polarizing people on the basis 5. The organizational culture must encourage openness and a of their membership in a particular group.135 high tolerance for debate and support constructive conflict The learning and effectiveness diversity on workrelated matters. paradigm offers four benefits.136 First, it values common ground. Dave Thomas of the 6. The culture must make workers feel valued. Harvard Business School explains: “Like the 7. The organization must have a well-articulated and widely fairness paradigm, it promotes equal opportuunderstood mission. This keeps discussions about work nity for all individuals. And like the access differences from degenerating into debates about the paradigm, it acknowledges cultural differvalidity of people’s perspectives. ences among people and recognizes the value 8. The organization must have a relatively egalitarian, in those differences. Yet this new model for nonbureaucratic structure. managing diversity lets the organization internalize differences among employees so that it Source: D. A. Thomas & R. J. Ely, “Making Differences Matter: A New Paradigm for Managing Diversity,” Harvard Business Review 74 (September–October 1996): 79–90. learns and grows because of them. Indeed, with the model fully in place, members of the organization can say, ‘We are all on the same team, with our differences—not despite them.’”137 Second, it makes a distinction between individual and group differences. When diversity focuses only on differences between groups, such as females versus white males, large differences within groups are ignored.138 For example, think of the women you know at work. Now, think for a second about what they have in common. After that, think about how they’re different. If your situation is typical, the list of differences should be just as long, if not longer, than the list of commonalties. In short, managers can achieve a greater understanding of diversity and their employees by treating them as individuals and by realizing that not all African Americans, Hispanics, women, or white males want the same things at work.139 Third, because the focus is on individual differences, the learning and effectiveness paradigm is less likely to encounter the conflict, backlash, and
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divisiveness sometimes associated with diversity programs that focus only on group differences. Taylor Cox, one of the leading management writers on diversity, says, “We are concerned here with these more destructive forms of conflict which may be present with diverse work forces due to language barriers, cultural clash, or resentment by majority-group members of what they may perceive as preferential and unwarranted treatment of minority-group members.”140 And Ray Haines, a consultant who has helped companies deal with the aftermath of diversity programs that became divisive, says, “There’s a large amount of backlash related to diversity training. It stirs up a lot of hostility, anguish, and resentment but doesn’t give people tools to deal with [the backlash]. You have people come in and talk about their specific ax to grind.”141 Certainly, not all diversity programs are divisive or lead to conflict. But, by focusing on individual rather than group differences, the learning and effectiveness paradigm helps to minimize these potential problems. Finally, unlike the other diversity paradigms that simply focus on the value of being different (primarily in terms of surface-level diversity), the learning and effectiveness paradigm focuses on bringing different talents and perspectives together (i.e., deep-level diversity) to make the best organizational decisions and to produce innovative, competitive products and services.
4.2 Diversity Principles While diversity paradigms represent general approaches or strategies for managing diversity, the diversity principles shown in Exhibit 12.9 will help managers do a better job of managing company diversity programs, no matter which diversity paradigm they choose.142 Begin by carefully and faithfully following and enforcing federal and state laws regarding equal opportunity employment. Diversity programs can’t and won’t succeed if the company is being sued for discriminatory actions and behavior. Faithfully following the law will also reduce the time and expense associated with EEOC investigations or lawsuits. Start by learning more at the EEOC Web site (http://www.eeoc.gov). Following the law also means strictly and fairly enforcing company policies. Treat group differences as important, but not special. Surface-level diversity dimensions such as age, gender, and race/ethnicity should be respected, but should not be treated as more important than other kinds of differences (i.e., deep-level diversity). Remember, the shift from surface- to deep-level diversity helps people know and understand each other better, reduces prejudice and conflict, and leads to stronger social integration with people wanting to work together and get the job done. Also, find the common ground. While Exhibit 12.9 respecting differences is important, it’s just as important, especially with Diversity Principles diverse work forces, to actively find ways for employees to see and share commonalties. 1. Carefully and faithfully follow and enforce federal and Tailor opportunities to individuals, not groups. state laws regarding equal employment opportunity. Special programs for training, development, mentor2. Treat group differences as important, but not special. ing, or promotions should be based on individual 3. Find the common ground. strengths and weaknesses, not on group status. Instead of making mentoring available for just one 4. Tailor opportunities to individuals, not groups. group of workers, create mentoring opportunities 5. Reexamine, but maintain, high standards. for everyone who wants to be mentored. For example, at Pacific Enterprises, all programs, including 6. Solicit negative as well as positive feedback. the Career Conversations forums, in which upper7. Set high but realistic goals. level managers are publicly interviewed about themselves and how they got their jobs, are open to all Source: L. S. Gottfredson, “Dilemmas in Developing Diversity Programs,” in Diversity in the Workplace, ed. S. E. Jackson & Associates (New York: Guildford Press, 1992). employees.143
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Reexamine, but maintain, high standards. Companies have a legal and moral obligation to make sure that their DON’T BREAK THE LAW IN THE NAME OF hiring and promotion procedures and standards are fair to DIVERSITY all. At the same time, in today’s competitive markets, compaAs you learned in Chapter 11 on human renies should not lower standards to promote diversity. This source management, the general effect of employment law, which is still evolving not only hurts the organizations, but also feeds the stereotype through court decisions, is that employthat applicants who are hired or promoted in the name of ers may not discriminate in employment affirmative action or diversity are less qualified. For example, decisions on the basis of gender, age, reat the Marriott Marquis Hotel in New York’s Time Square, ligion, color, national origin, race, or diswhich has 1,700 employees who come from 70 countries and ability. Employment decisions should be speak 47 different languages, managers are taught to cope based on factors that are “job related,” with diversity by focusing on job performance. Jessica “reasonably necessary,” or a “business Brown, a quality-assurance manager who checks the cleanlinecessity” for successful job perforness of rooms, says, “I don’t lower my standards for mance. With one exception (see Chapter anybody.”144 11 for further explanation), employers Solicit negative as well as positive feedback. Diversity is who use gender, age, race, or religion to make employment-related decisions one of the most difficult management issues. No company or when those factors are unrelated to an manager gets it right from the start. Consequently, companies applicant’s or employee’s ability to pershould aggressively seek positive and negative feedback about form a job may face charges of discrimitheir diversity programs. One way to do that is to use a series nation from employee lawsuits or the of measurements to see if progress is being made. L’Oreal, the Equal Employment Opportunity Commiscosmetics firm, has goals and measurements to track its sion. So, do the right thing. Stay within progress in diversity with respect to recruitment, retention, the law as you build a diverse work force. and advancement, as well as the extent to which the company buys goods and services from minority- and women-owned suppliers.145 Set high but realistic goals. Just because diversity is difficult doesn’t mean that organizations shouldn’t try to accomplish as much as possible. The general purpose of diversity programs is to try to create a positive work environment where no one is advantaged or disadvantaged, where “we” is everyone, where everyone can do his or her best work, where differences are respected and not ignored, and where everyone feels comfortable. Even if progress is slow, companies should not shrink from these goals.
4.3 Diversity Training and Practices
awareness training Training that is designed to raise employees’ awareness of diversity issues and to challenge the underlying assumptions or stereotypes they may have about others.
skills-based diversity training Training that teaches employees the practical skills they need for managing a diverse work force, such as flexibility and adaptability, negotiation, problem solving, and conflict resolution.
Organizations use diversity training and several common diversity practices to manage diversity. There are two basic types of diversity training programs. Awareness training is designed to raise employees’ awareness of diversity issues, such as the dimensions discussed in this chapter, and to get employees to challenge underlying assumptions or stereotypes they may have about others. As a starting point in awareness training, some companies have begun using the Implicit Association Test (IAT), which measures the extent to which people associate positive or negative thoughts (i.e., underlying assumptions or stererotypes) with blacks or whites, men or women, homosexuals or heterosexuals, young or old, or other groups. For example, test takers are shown black or white faces and must then instantly pair them with lists of words. Response times (shorter responses generally indicate stronger associations) and the pattern of associations indicates the extent to which people are biased. Most people are, and strongly so. For example, 88 percent of whites have a more positive mental assocation toward whites than toward blacks, but, surprisingly, so do blacks, 48 percent of whom show the same bias. Taking the IAT is a good way to increase awareness of diversity issues. To take the IAT and to learn more about the decade of research behind it, go to http://implicit.harvard.edu.146 By contrast, skills-based diversity training teaches employees the practical skills they need for managing a diverse work
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force, such as flexibility and adaptability, negotiation, problem solving, and conflict resolution.147 Companies also use diversity audits, diversity pairing, and minority experiences for top executives to better manage diversity. Diversity audits are formal assessments that measure employee and management attitudes, investigate the extent to which people are advantaged or disadvantaged with respect to hiring and promotions, and review companies’ diversity-related policies and procedures. For example, the results of a formal diversity audit prompted BRW, an architecture and engineering firm, to increase job advertising in minority publications, set up a diversity committee to make recommendations to upper management, provide diversity training for all employees, and rewrite the company handbook to make a stronger statement about the company’s commitment to a diverse work force.148 Earlier in the chapter you learned that mentoring, pairing a junior employee with a senior employee, is a common strategy for creating learning and promotional opportunities for women. Diversity pairing is a special kind of mentoring. In diversity pairing, people of different cultural backgrounds, genders, or races/ethnicities are paired for mentoring. The hope is that stereotypical beliefs and attitudes will change as people get to know each other as individuals.149 Consultant Tom McGee, who has set up mentoring programs for numerous companies, supports diversity pairing, saying “the assumption that people participating in diversity mentoring programs are looking for someone of the same race or gender has been proved wrong in many cases.”150 Pat Carmichael, an African American female vice president at J.P. Morgan Chase bank, who was mentored early in her career by a white male, mentors men and women of all backgrounds. Regarding a current mentee, John Imperiale, a white assistant branch manager, she says, “My hope is that the exposure John has to me will give him insights when he’s managing a diverse group of employees.”151 Finally, because top managers are still overwhelmingly white and male, a number of companies believe that it is worthwhile to have top executives experience what it is like to be in the minority. This can be done by having top managers go to places or events where nearly everyone else is of a different gender or racial/ethnic background. At Hoechst Celanese (which has now split into two companies), top managers would join two organizations in which they were a minority. For instance, the CEO, a white male, joined the board of Hampton University, a historically African American college, and Jobs for Progress, a Hispanic organization that helps people prepare for jobs. Commenting on of his experiences, he said, “The only way to break out of comfort zones is to be exposed to other people. When we are, it becomes clear that all people are similar.” A Hoechst vice president who joined three organizations in which he was in the minority said, “Joining these organizations has been more helpful to me than two weeks of diversity training.152
Review 4: Managing Diversity The three paradigms for managing diversity are the discrimination and fairness paradigm (equal opportunity, fair treatment, strict compliance with the law), the access and legitimacy paradigm (matching internal diversity to external diversity), and the learning and effectiveness paradigm (achieving organizational plurality by integrating deep-level diversity into the work of the organization). Unlike the other paradigms that focus on surface-level differences, the learning and effectiveness program values common ground, distinguishes between individual and group differences, minimizes conflict and divisiveness, and focuses on bringing different talents and perspectives together. What principles can companies use when managing diversity? Follow and enforce federal and state laws regarding equal employment opportunity. Treat group differences as important, but not special. Find the common ground. Tailor opportunities to individuals, not groups. Reexamine, but maintain, high standards. Solicit negative as well as
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diversity audits Formal assessments that measure employee and management attitudes, investigate the extent to which people are advantaged or disadvantaged with respect to hiring and promotions, and review companies’ diversity-related policies and procedures.
diversity pairing A mentoring program in which people of different cultural backgrounds, genders, or races/ethnicities are paired together to get to know each other and change stereotypical beliefs and attitudes.
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positive feedback. Set high but realistic goals. The two types of diversity training are awareness training and skills-based diversity training. Companies also manage diversity through diversity audits and diversity pairing and by having top executives experience what it is like to be in the minority.
Key Terms affectivity, 401 affirmative action, 385 age discrimination, 390 agreeableness, 397 authoritarianism, 399 awareness training, 406 conscientiousness, 397 deep-level diversity, 389 disability, 394 disability discrimination, 394 disposition, 396 diversity, 384
diversity audits, 407 diversity pairing, 407 emotional stability, 397 external locus of control, 400 extraversion, 396 gender discrimination, 391 glass ceiling, 391 internal locus of control, 400 locus of control, 400 Machiavellian, 399 mood linkage, 401 negative affectivity, 401
openness to experience, 397 organizational plurality, 404 personality, 396 positive affectivity, 401 racial and ethnic discrimination, 392 skills-based diversity training, 406 social integration, 389 surface-level diversity, 389 Type A personality, 399 Type A/B personality dimension, 399
Type B personality, 400
Concept Check 1. Explain the difference between diversity and affirmative action. 2. Does diversity make good business sense? Explain your answer. 3. What is the current trend in the United States with respect to workplace diversity? Use information from the chapter to defend your answer. 4. Distinguish between surface-level and deep-level diversity. 5. Identify and describe the big five dimensions of personality. People with which dimension are inherently more motivated and better at their jobs?
6. Identify and describe the work-related personality dimensions. 7. What is affectivity? Why do managers need to understand affectivity? 8. Compare the three paradigms for managing diversity. Discuss the benefits and limitations of each. 9. Explain the difference between organizational plurality and diversity. 10. Define and give examples of two types of diversity training. Which do you think would be more successful? Why?
Self-Assessment DO YOU KNOW YOUR MIND? Do you always speak your mind? Chances are that you probably don’t—at least not always. In some cases, you may not even know your mind. Our conscious mind is not always aligned with our subconscious, and we may be motivated by deeply held beliefs that diverge from our image of who we are or want to be. Researchers at
Harvard have developed a series of assessments to help you identify your implicit associations about a variety of topics, many related to the diversity issues you learned about in this chapter. The Self-Assessment Appendix gives you instructions on completing a set of online tests at http://implicit.harvard.edu. Flip to page 620 to get started.
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Management Decision COMPANY OF INTJS SEEKS ESFP EMPLOYEE Every business magazine you’ve picked up recently has had some kind of article on personality testing in the workplace.153 You’ve read about the Caliper, used by FedEx, the Chicago Cubs, and the WNBA’s Phoenix Mercury. Anne Mariucci, part-owner of the Mercury, uses the test to evaluate potential draft picks and make coaching assignments. With the help of a consultant, venerable retailer Neiman Marcus designed a test to identify the characteristics needed to be a successful sales associate; as a result, it has increased sales per associate by 42 percent and reduced staff turnover by 18 percent. Today, you’re reading about a personality test originally designed for Olympic teams and military units (small groups in highpressure situations with a single, focused goal). As you close your magazine, you can’t help thinking about diversity. As the manager in a medium-sized candy company, you have always made sure that your work force was diverse with respect to minorities and women, but until now you’ve never considered managing based on personalities. Even though personality tests sound like a good idea (lots of reputable companies are using them), you wonder about the drawbacks. There must be some, in addition to the several hundred dollars it would cost to test each of your 75 employees, or you would have started testing a long time ago. The stack of articles you’ve read, however, is prompting you to think that personality testing might be a good idea. It looks like the only way to ensure deep-level diversity. New wave of tests, like the NEO Personality Inventory (Neuroticism, Extroversion, and
Openness) and the Occupational Personality Questionnaire, make less sweeping generalizations than their predecessors. By using narrower indicators, the NEO and OPQ can identify how people will behave in certain situations and, ultimately, how well an employee’s personality is suited to the tasks his or her job requires. Testing is already a $400 million industry in the United States, and it’s growing at 8 percent a year. The amount spent on personality testing alone has increased 10 to 15 percent each of the last three years. Most Fortune 500 companies use the venerable Myers-Briggs test. A recent study found that poorly performing employees cost U.S. employers $100 billion a year, so perhaps it’s time to jump on the bandwagon. Questions 1. If you knew the personality profiles of your workers, how would you actually use the information to benefit the company? Can personality testing help you achieve the company’s goal of becoming one of the largest candy makers in North America? 2. Does personality testing help cultivate deep-level diversity, or does it do the opposite, ensuring a company staffed with people who are the same? Is there another way to cultivate deep-level diversity besides personality testing? 3. Do you see any drawbacks to personality testing? In addition to a diverse work force, what benefits could a manager derive from personality testing? 4. Do you begin personality testing? Explain your answer.
Management Team Decision IS OLDER NECESSARILY WISER? Two weeks ago, you were pleased to receive a fat envelope from the U.S. government awarding your aeronautics company several hefty contracts with the Department of Defense.154 As a result of the contracts, you’ll have to increase production, so you immediately placed ads in the local paper for four skilled mechanics. Résumés have been flooding in, and to your surprise, you are now sorting the prospective applicants into two groups. In addition to the usual crop of inexperienced youngsters eager to start their careers, you have an equally large pool of retired mechanics, many of them older than 65. They’ve spent their entire lives building planes and now want to work only 15 to 20 hours a week.
Flipping through the second pile, you realize that you face a difficult decision. Younger hires would require more training and supervision, but they could eventually become productive full-timers with the potential to stay at the company for most (if not all) of their careers. On the other hand, older veterans would be able to jump in feet first, but they would work fewer hours and probably have much shorter careers with the company. Whereas the veterans will expect pay commensurate with their experience, the newbies will accept much lower starting salaries Between 2000 and 2010, the number of Americans between the ages of 55 and 64 will jump 47 percent, compared with a scant 2.8 percent increase in the num-
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ber of those aged 25 to 34. The group that makes up the bulk of most companies’ management talent, those aged 35 to 45, will actually shrink by 13.7 percent! With the graying of the work force, this may be the first time you have to decide whether to hire older or younger workers, but it certainly won’t be the last. For this exercise, assemble a team of three to four students to represent the senior management team at the aeronautics firm in the scenario. Try using the
dialectical inquiry technique discussed in Chapter 5 (Planning and Decision Making) on page 132. Questions 1. Do you hire older workers or younger workers? Explain your choice. 2. What challenges can you foresee in managing a multigenerational work force?
Develop Your Career Potential FROM MAJORITY TO MINORITY AND BACK AGAIN Do you know what it feels like to walk into a room where, because of your gender, race/ethnicity, religion, language, or some other dimension, you are intensely aware of being different from everyone else?155 Some of you do. Most of you probably don’t. And, since most managers are white and male, it’s a good bet that they don’t know either. The experience can be unsettling, especially the first time it happens. Some companies have begun broadening perspectives and understanding by having their managers join groups or attend events where they are different from everyone else. As you read in Section 4.3, at Hoechst Celanese, the CEO, a white male, joined the board of Hampton University, a historically African American college, and Jobs for Progress, a Hispanic organization that helps people prepare for jobs. For more than 30 years, UPS has required its top managers to participate in community service programs in inner cities or poor rural areas. James Casey, UPS’s founder, started the program in 1968 to expose his white male managers to diverse experiences, people, and communities. Casey also hoped that the experience would increase empathy, break down stereotypes, and encourage volunteer and community service. Today, managers with 10 to 30 years of experience are assigned to community service tasks in inner cities or rural areas. Don Wofford, who directs the program, says, “We choose managers on the fast track, people
who’ll be positioned to influence their work force and the community for years to come.” The managers spend two weeks doing community service, followed by a weekend at home and then two more weeks of community service. Wofford says, “This format gives them a chance to digest the experience—they tend to come back renewed after the break, with a new focus, sometimes even more bewildered, but still ready to go for it.” Your assignment is to attend an event, meeting, or activity where you are different from almost everyone else in terms of your gender, race/ethnicity, religion, language, or some other dimension. You can choose a church service, local community group, volunteer organization, or student group on campus. Ask your professor for ideas. You should probably contact the group beforehand to arrange your visit. Answer the following questions after your visit. Questions 1. Describe the event, meeting, activity, and/or organization you visited. 2. How were you different from others in attendance? Describe what it was like to be different from everyone else. 3. In what ways was this experience actually similar to previous experiences that you’ve had? In other words, while question 2 focuses on differences, this question focuses on similarities and commonalties. 4. What did you learn from this experience?
Take Two
Biz Flix In Good Company
In Good Company, a 2004 film, stars Dennis Quaid as Dan Foreman, a seasoned advertising sales executive at the magazine, Sports America. A corporate takeover results in Dan having a new supervisor named Carter Duryea. On his first day on the job, Carter confesses to a young woman he meets on the elevator that he doesn't know what he's doing. In this scene, Dan and Carter meet for the first time. What to Watch for and Ask Yourself
1. How does this scene relate to diversity? 2. Review the Chapter 2 clip from the same movie. How diverse is the advertising department at Sports America? Explain. 3. Consider the two clips together and think about deep-level diversity. Why do you think Sports America hired Carter Duryea?
Management Workplace Diversified Chemical
At Diversified Chemical in Detroit, everyone is excited about chemistry and its ability to positively affect the world through innovation. Since 1971, when Arnold Joseff and George Hill founded the company, Diversified Chemical has grown into a holding company with four subsidiaries and 200 employees who generate over $70 million in annual sales. That growth was powered by the diverse perspectives and experiences of Diversified’s employees, who created a continuous string of innovative products and business opportunities. What to Watch for and Ask Yourself
1. Which diversity paradigm best describes what is happening at Diversified Chemical? 2. Using the dimensions discussed in the chapter, describe the work-related personalities of Arnold Joseff and George Hill. 3. What does diversity mean at Diversified Chemical?
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Part 4 Leading
CHAPTER 13
Motivation 414 CHAPTER 14
Leadership 448 CHAPTER 15
Managing Communication 484
Motivation
C H A P T E R
O U T L I N E
Chapter13 What Would You Do? What Is Motivation? 1. Basics of Motivation 1.1 1.2 1.3 1.4
Effort and Performance Need Satisfaction Extrinsic and Intrinsic Rewards Motivating with the Basics
How Perceptions and Expectations Affect Motivation 2. Equity Theory 2.1 Components of Equity Theory 2.2 How People React to Perceived Inequity 2.3 Motivating with Equity Theory
3. Expectancy Theory 3.1 Components of Expectancy Theory 3.2 Motivating with Expectancy Theory
How Rewards and Goals Affect Motivation 4. Reinforcement Theory 4.1 Components of Reinforcement Theory
4.2 Schedules for Delivering Reinforcement 4.3 Motivating with Reinforcement Theory
5. Goal-Setting Theory 5.1 Components of Goal-Setting Theory 5.2 Motivating with Goal-Setting Theory
6. Motivating with the Integrated Model Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise Xtra! Fourteen exhibit worksheets, author FAQs, quiz, Management News, and the video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
Wegmans’ Headquarters, Rochester, New York.1 “Another Wal-Mart?” “Yep. Another Wal-Mart, this time on Transit Road.” “That mean’s that 40 of our 68 stores are within 20 miles of a Wal-Mart supercenter (a Wal-Mart with a grocery store).” “Ouch.” “Well, I was going to use another word, but ‘ouch’ will do.” That was your father, the previous CEO of Wegmans, phoning to tell you that Wal-Mart was opening yet another supercenter near one of your grocery stores. When that happens, it’s usually a very bad thing for Wal-Mart’s competitors. Any time Wal-Mart opens a new supercenter, two nearby supermarket stores will close, put out of business by Wal-Mart’s low prices. And the nearby stores that survive will end up cutting their prices by 13 percent to keep customers and fend off Wal-Mart. How can Wal-Mart charge such low prices? One reason is that as the largest grocer in the world, it has high-volume purchasing power. Indeed, with nearly 1,300 supercenters and $288 billion in revenues, Wal-Mart has considerably more leverage to pressure suppliers to cut prices than Wegman’s with its 68 stores and $3 billion in revenues. And those lower prices have been cutting through the grocery business like a hot knife through butter. Over the last five years, Albertson’s, Kroger, Safeway, and Ahold USA (Giant supermarkets), the next four largest grocery chains after Wal-Mart, have given their shareholders negative returns, ranging from –49 to –78 percent. Wal-Mart, by contrast, has given its shareholders average annual returns of 22 percent. Your father says that if Wegmans, in business since 1915, could survive the Great Depression, it can survive Wal-Mart. As you tell your Dad, though, “The question is, ‘How do we differentiate ourselves?’ We need to do something WalMart can’t do.” Well, with its focus on low prices, what Wal-Mart typically can’t do is provide great service. But to provide great service, you’ll need a highly educated, motivated work force, and accomplishing that won’t be easy. The grocery business is one of the most competitive around. It’s hard to eke out profits when the average margin is between 2 and 4 percent. Plus, because of low pay, long hours, and, frankly,
What Would You Do?
a mundane industry that doesn’t attract and keep top-notch talent (after all, who thinks about a career in the grocery business?), employee turnover averages 100 percent per year. In fact, turnover costs are so high and profit margins are so low (because of intense competition) that for the grocery industry as a whole, employee turnover costs are 40 percent greater than industry profits! Not surprisingly, over the last 13 years, 13,500 individual grocery stores, 17 percent in all, have closed because they weren’t profitable. Well, you can’t beat Wal-Mart on price. Therefore, despite the low pay, boring jobs, and high turnover, you’ll have to find a way to create a highly motivated work force dedicated to providing outstanding customer service if you want to survive. But how do you do that when you can’t raise prices and costs have to be kept low? Well, let’s break the problem down: (1) What can you do to motivate people to want to work at Wegmans grocery stores? Remember, too, these people have to be service oriented, energetic, and willing to learn. Just any “warm body” who walks through the front door won’t do. (2) Once you’ve attracted the right people, how STUDY TIP do you motivate them to give One way to make sure you unexceptional service in a grocery derstand the concepts in the store? Most people think that chapter is to recreate the chap“service” and “grocery store” don’t belong in the same ter outline from scratch. After sentence, but if you want to you read Chapter 13, write carve out a profitable niche down as many concepts and against Wal-Mart, you’re going terms as you can remember to have to convince employees from your reading. You’ll see and your customers that they do. (3) What can you do to right away where you have persuade energetic, highly gaps in your understanding! motivated, service-oriented You can also use some of the employees to “make a career” earlier study tips to review at Wegmans. What will motiChapter 13 material. vate people to “make a career” in the grocery store business? If you were in charge at Wegmans, what would you do?
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What makes people happiest and most productive at work? Is it money, benefits, opportunities for growth, interesting work, or something else altogether? And if people desire different things, how can a company keep everyone motivated? The set of problems that Wegmans is experiencing illustrates that motivating workers is never easy. It takes insight and hard work to motivate workers to join the company, perform well, and then stay with the company. This chapter begins by reviewing the basics of motivation—effort, needs, and intrinsic and extrinsic rewards. We will start with a basic model of motivation and add to it as we progress through each section in the chapter. Next, we will explore how employees’ equity perceptions and reward expectations affect their motivation. If you’re familiar with the phrase “perception is reality,” you’re off to a good start in understanding the importance of perceptions and expectations in motivation. The third part of the chapter reviews the role that rewards and goals play in motivating employees. You’ll see that finding the right combination of goals and rewards is much harder in practice than it looks. The chapter finishes with a summary of practical, theory-based actions that managers can take to motivate their workers.
What Is Motivation? motivation The set of forces that initiates, directs, and makes people persist in their efforts to accomplish a goal.
Motivation is the set of forces that initiates, directs, and makes people persist in their efforts to accomplish a goal.2 In terms of this definition, initiation of effort is concerned with the choices that people make about how much effort to put forth in their jobs. (“Do I really knock myself out for these performance appraisals or just do a decent job?”) Direction of effort is concerned with the choices that people make in deciding where to put forth effort in their jobs. (“I should be spending time with my high-dollar accounts instead of learning this new computer system!”) Persistence of effort is concerned with the choices that people make about how long they will put forth effort in their jobs before reducing or eliminating those efforts. (“I’m only halfway through the project, and I’m exhausted. Do I plow through to the end, or just call it quits?”) As Exhibit 13.1 shows, initiation, direction, and persistence are at the heart of motivation.
1
1
After reading the next section, you should be able to explain the basics of motivation.
BASICS OF MOTIVATION
Take your right hand and point the palm toward your face. Keep your thumb and pinky finger straight and bend the three middle fingers so the tips are Exhibit 13.1 touching your palm. Now rotate your wrist back and forth. If you were in the The Components of Motivation Regent Square Tavern in Pittsburgh, Pennsylvania, that hand signal would tell waitress Marjorie Landale that you wanted a Yeungling beer. Marjorie, who isn’t deaf, would not have understood that sign a few years ago. But with a state school for the deaf nearby, the tavern always has its share of deaf customers, Direction so she decided on her own to take classes to learn how to sign. At first, deaf customers would signal for a pen and paper to write out their orders. But after Marjorie signaled that she was learning to sign, “their eyes [would] Initiation Persistence light up, and they [would] finger-spell their order. Word quickly spread as the students started bringing in their friends, classmates, teachers, and hearing friends as well. Says
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Marjorie, “The deaf customers are patient with my amateur signing. They appreciate the effort.”3 What would motivate an employee like Marjorie to voluntarily learn a new language like American Sign Language? (Sign language is every bit as much as a language as French or Spanish.) She wasn’t paid to take classes in her free time. She chose to do it on her own. And while she undoubtedly makes more tip money with a full bar than with an empty one, it’s highly unlikely that she began her classes with the objective of making more money. Just what is it that motivates employees like Marjorie Landale? Let’s learn more about motivation by building a basic model of motivation out of 1.1 effort and performance, 1.2 need satisfaction, and 1.3 extrinsic and intrinsic rewards and then discussing 1.4 how to motivate people with this basic model of motivation.
1.1 Effort and Performance When most people think of work motivation, they think that working hard (effort) should lead to a good job (performance). Exhibit 13.2 shows a basic model of work motivation and performance, displaying this process. The first thing to notice about Exhibit 13.2 is that this is a basic model of work motivation and performance. In practice, it’s almost impossible to talk about one without mentioning the other. Not surprisingly, managers often confuse the two, saying things such as “Your performance was really terrible last quarter. What’s the matter? Aren’t you as motivated as you used to be?” In fact, motivation is just one of three primary determinants of job performance. In industrial psychology, job performance is frequently represented by this equation: Job Performance = Motivation 3 Ability 3 Situational Constraints In this formula, job performance is how well someone performs the requirements of the job. Motivation, as defined above, is effort, the degree to which someone works hard to do the job well. Ability is the degree to which workers possess the knowledge, skills, and talent needed to do a job well. And situational constraints are factors beyond the control of individual employees, such as tools, policies, and resources that have an effect on job performance. Since job performance is a multiplicative function of motivation times ability times situational constraints, job performance will suffer if any one of these components is weak. For example, in 1988, the East German bobsled team was fully funded by the East German government and had state-of-the-art coaching and equipment (no situational constraints). The team members were recruited and selected from a large pool of talented athletes (ability) who had trained year-round for most of their lives (motivation) for a chance to make the highly 13.2 prestigious team. By contrast, consider the Jamaican bobsled team that Disney Exhibit A Basic Model of Work Motivation made famous in the movie Cool Runnings. In 1988 at its first Winter Olympics, and Performance the team had limited funding, a coach with bobsledding experience (a five-time U.S. champion) but no coaching experience, and an old bobsled that couldn’t compete with the world-class equipment used by the best teams (high situational constraints). Furthermore, its Effort members had been raised in tropical Jamaica and had almost no • Initiation bobsledding or winter sports experience (very little ability). Performance Nonetheless, they dreamed of competing in the Olympics and did • Direction what they could to train for several months, considering their • Persistence limited circumstances (strong motivation). It’s not hard to guess which team did better, is it? With ample motivation, ability, and almost no situational constraints, you’d expect the East Germans to be competitive, and they were—finishing second and third in the two-man competition and second in the
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THE RIGHT THIN G G IN DO
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FAKING IT, NOT MAKING IT With technology these days, you may be tempted to engage in “impression management” to try to convince your boss and coworkers that you’re working hard when you’re really not. For instance, a tech support worker who enjoyed threehour lunches used a program on his Palm personal computer to remotely control his office computer. He would open, close, and move files so it would look as if he had just stepped away from his desk. Other employees write emails before they go home and then “send” them after midnight (I won’t tell you how this is done) to make it look as though they are still at work. Another trick is to leave early, but then send emails on the way home via your Blackberry device so it will appear that you are still at the office. You may be thinking that these ruses are harmless, but 59 percent of human resource managers and 53 percent of supervisors have caught employees lying about the hours they work. Furthermore, if you’re using technology to fake it, you’re usually leaving high-tech “tracks” and “footprints” along the way. That tech worker who controlled his office computer with his Palm PC at lunch was fired for “habitual lateness.” Motivation is all about effort. So, do the right thing. Work hard for your company, your customers, and yourself.6
needs The physical or psychological requirements that must be met to ensure survival and well-being.
four-man competition.4 By contrast, with strong motivation, little ability, and extremely high situational constraints, the Jamaican two-man team finished in 35th place, while the fourman team crashed spectacularly and had to push the bobsled across the line to complete the final run on the course. Does this mean that motivation doesn’t matter? No, not at all. It just means that all the motivation in the world won’t translate into high performance when you have little ability and high situational constraints. In fact, prior to the 1996 Winter Olympics, the Jamaican team spent six weeks working with Sam Bock, who also worked with the elite Canadian team. Bock put the Jamaicans through their paces at a special bobsled training center in Oberhof, Germany. After training for four to eight hours a day in world-class conditions under world-class tutelage, the Jamaican four-man team finished in 14th place, ahead of the Americans, French, Russians, and one of the two Swiss and Italian teams. The two-man team did even better, finishing 10th.5
1.2 Need Satisfaction
In Exhibit 13.2, we started with a very basic model of motivation in which effort leads to job performance. However, managers want to know, “What leads to effort?” And they will try almost anything they can to find the answer. For example, even though video game maker Electronic Arts pays highly competitive salaries and has a great benefits package, it still offers outstanding working conditions and nonfinancial rewards to encourage employee effort, such as providing high-performing employees or teams with parking spots on the first floor of its indoor parking garage (it may sound silly, but good parking spots are highly prized in nearly every organization). Most EA employees have access to at-work movie theaters, fitness centers, sound studios, and a bar (free drinks from 5 to 6 P.M on Fridays). There’s even a maze, 81 feet across, that employees can try to traverse when they need a break from their coding or creative work.7 And if that doesn’t regenerate their energy, they can down as many free espressos as they want at the company cafeteria. Likewise, employees at Wilton Connor Packaging, Inc. in Charlotte, North Carolina, can take their laundry to work and have it washed, dried, and folded. The company also employs a handyman, who does free minor household repairs for employees while they’re at work. At AutoDesk in San Rafael, California, employees can take their dogs to work.8 So which of these techniques will motivate employees and lead to increased effort? The answer is all of them and none of them: It depends on the employees’ needs. Needs are the physical or psychological requirements that must be met to ensure survival and well-being.9 As shown on the left side of Exhibit 13.3, a person’s unmet need creates an uncomfortable, internal state of tension that must be resolved. For example, if you normally skip breakfast, but then have to work through lunch, chances are you’ll be so hungry by late afternoon that the only thing you’ll be motivated to do is find something to eat. So, according to needs theories, people are motivated by unmet needs. But once a need is met, it no longer motivates. When this occurs, people become satisfied, as shown on the right side of Exhibit 13.3. Note: Throughout the chapter, as we build on this basic model, the parts of the model that we’ve already discussed will appear shaded in color. For example, since we’ve already discussed the effort S performance part of the model, those components are shown with a colored background. When we add new parts to the model, they will have a white background. For instance, since we’re adding need satisfaction to the model at this step, the need-satisfaction components of
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Effort Unsatisfied Need
Tension
Energized to Take Action
• Initiation • Direction
Performance
Satisfaction
• Persistence
As shown on the left side of this exhibit, a person’s unsatisfied need creates an uncomfortable, internal state of tension that must be resolved. So, according to needs theories, people are motivated by unmet needs. But once a need is met, it no longer motivates. When this occurs, people become satisfied, as shown on the right side of the exhibit.
unsatisfied need, tension, energized to take action, and satisfaction are shown with a white background. This shading convention should make it easier to understand the work motivation model as we add to it in each section of the chapter. Since people are motivated by unmet needs, managers must learn what those unmet needs are and address them. This is not always a straightforward task, however, because different needs theories suggest different needs categories. Exhibit 13.4 shows needs from three well-known needs theories. Maslow’s Hierarchy of Needs suggests that people are motivated by physiological (food and water), safety (physical and economic), belongingness (friendship, love, social interaction), esteem (achievement and recognition), and self-actualization (realizing your full potential) needs.10 Alderfer’s ERG Theory collapses Maslow’s five needs into three: existence (safety and physiological needs), relatedness (belongingness), and growth (esteem and self-actualization).11 McClelland’s Learned Needs Theory suggests that people are motivated by the need for affiliation (to be liked and accepted), the need for achievement (to accomplish challenging goals), or the need for power (to influence others).12 Things become even more complicated when we consider the different predictions made by these theories. According to Maslow, needs are arranged in a hierarchy from low (physiological) to high (self-actualization). Within this hierarchy, people are motivated by their lowest unsatisfied need. As each need is met, they work their way up the hierarchy from physiological to self-actualization needs. By contrast, Alderfer says that people can be motivated by more than one need at a time. Furthermore, he suggests that people are just as likely to move down the needs hierarchy as up, particularly when they are unable to achieve satisfaction at the next higher need level. McClelland, on the other hand, argues that the degree to which particular needs motivate varies tremendously from person to person, with some people being motivated primarily by achievement and others by power or affiliation. Moreover, McClelland says that needs are learned, not innate. For instance, studies show that children whose parents own a small business or hold a managerial position are much more likely to have a high need for achievement.13 So, with three different sets of needs and three very different ideas about how needs motivate, how do we provide a practical answer to managers who just want to know “What leads to effort?” Fortunately, the research evidence simplifies things a bit. To start, studies indicate that there are two basic kinds of needs categories.14 As shown in Exhibit 13.4, lower-order needs are concerned with safety and with physiological and existence requirements, whereas higher-order needs are concerned with relationships (belongingness, relatedness, and affiliation); challenges and accomplishments (esteem, self-actualization, growth, and achievement); and influence (power). Studies generally show that higher-order needs will not motivate people as long as lower-order needs remain unsatisfied.15 For example, imagine that you graduated from college six months ago and are still looking for your first job. With money running short (you’re probably living on your credit cards) and the possibility of having to move back in with
Exhibit 13.3 Adding Need Satisfaction to the Model
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your parents looming (if this doesn’t motivate you, what will?), your basic needs for HigherSelf-Actualization Growth Power food, shelter, and security drive Order Esteem Relatedness Achievement your thoughts, behavior, and Needs Belongingness Affiliation choices at this point. But once you land that job, find a great LowerSafety Existence place (of your own!) to live, Order Physiological and put some money in the Needs bank, these basic needs should Exhibit 13.4 decrease in importance as you begin to think about making new friends and Needs Classification of Different taking on challenging work assignments. In fact, once lower-order needs are Theories satisfied, it’s difficult for managers to predict which higher-order needs will motivate behavior.16 Some people will be motivated by affiliation, while others will be motivated by growth or esteem. Also, the relative importance of the various needs may change over time, but not necessarily in any predictable pattern. So, what leads to effort? In part, needs do. Subsection 1.4 discusses how managers can use what we know from need-satisfaction theories to motivate workers. MASLOW’S HIERARCHY
ALDERFER’S ERG
McCLELLAND’S LEARNED NEEDS
1.3 Extrinsic and Intrinsic Rewards
extrinsic reward A reward that is tangible, visible to others, and given to employees contingent on the performance of specific tasks or behaviors.
No discussion of motivation would be complete without considering rewards. Let’s add two kinds of rewards, extrinsic and intrinsic, to the model, as shown in Exhibit 13.5.17 Extrinsic rewards are tangible and visible to others and are given to employees contingent on the performance of specific tasks or behaviors.18 External agents (managers, for example) determine and control the distribution, frequency, and amount of extrinsic rewards, such as pay, company stock, benefits, and promotions. For example, Edge Software Services uses the “bonus bucket” method to reward its managers and employees. As the company meets profit targets, it shares an increasing percentage of those profits with employees, hence the name “bonus bucket.” The system works like this. If the first profit target is $2 million, the bonus shared among employees might be 5 percent, or $100,000. Then employees share 7.5 percent, or $150,000, of the next $2 million in profit, and so forth. Company president Kevin Clark says, “The incentive has no upside limit. What I wanted to do was create an environment in which people were rewarded.”19 The risk, of course, is that profits can’t be shared if they’re not made. Indeed, profits have been small recently, and, according to Clark, “not a lot of bonuses were paid.” Why do companies need extrinsic rewards? To get people to do things they wouldn’t otherwise do. Companies use extrinsic rewards to motivate people to perform four basic behaviors: join the organization, regularly attend their jobs, perform their jobs well, and stay with the organization.20 Think about it. Would you show up to work every day to do the best possible job that you could just out of the goodness of your heart? Very few people would. This is why CDW (Computer Discount Warehouse) rewards its employees for staying with the company. CDW found that new employees are only one-third as productive as employees who have at least three years of experience with the company. Accordingly, CDW has an “old-timers” program that rewards employees who have been with the company at least three years with a four-day, three-night trip for themselves and their families anywhere in the continental United States. There is one catch: the company has to meet its sales goals. But if it does, the company pays for the airline tickets and hotel costs associated with those trips. And CDW pays for such trips every year that employees stay with the company beyond three years.21 At CDW’s expense, account manager Brigid Brindley has
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Intrinsic Rewards Effort Unsatisfied Need
Tension
Energized to Take Action
• Initiation • Direction
Performance
Satisfaction
• Persistence Extrinsic Rewards
Performing a job well can be rewarding intrinsically (the job itself is fun, challenging, or interesting) or extrinsically (as you receive better pay or promotions, etc.). Intrinsic and extrinsic rewards lead to satisfaction of various needs.
taken her family to California and Washington, D.C., and is planning a trip to Seattle. Brindley said this about CDW: “They recognize that there are other things in life that you do besides just work.” By contrast, intrinsic rewards are the natural rewards associated with performing a task or activity for its own sake. For example, aside from the external rewards management offers for doing something well, employees often find the activities or tasks they perform interesting and enjoyable. Examples of intrinsic rewards include a sense of accomplishment or achievement, a feeling of responsibility, the chance to learn something new or interact with others, or simply the fun that comes from performing an interesting, challenging, and engaging task. For instance, researcher Mark Rise works for Medtronic, a leading medical technology company. Rise, one of Medtronic’s most creative inventors, could have a more prestigious job at a university or make more money starting his own company, but he doesn’t want to test theory or develop marketing plans or raise venture capital. What matters most to him is developing products that make a difference in people’s lives. Says Rise, “That’s what keeps me tied to what I’m doing now.” Indeed, Rise thrives on the intrinsic aspects of his work such as being able to work with physicians, medical researchers, software developers, and engineers to identify new treatments and design and manufacture new products.22 Which types of rewards are most important to workers in general? A number of surveys suggest that both extrinsic and intrinsic rewards are important. One survey found that the most important rewards were good benefits and health insurance, job security, a week or more of vacation (all extrinsic rewards), interesting work, the opportunity to learn new skills, and independent work situations (all intrinsic rewards). And employee preferences for intrinsic and extrinsic rewards appear to be relatively stable. Studies conducted over the last three decades have consistently found that employees are twice as likely to indicate that “important and meaningful work” matters more to them than what they are paid.23
1.4 Motivating with the Basics So, given the basic model of work motivation in Exhibit 13.5, what practical steps can managers take to motivate employees to increase their effort? As shown in Exhibit 13.6, start by asking people what their needs are. If managers don’t know what workers’ needs are, they won’t be able to provide
Exhibit 13.5 Adding Rewards to the Model
intrinsic reward A natural reward associated with performing a task or activity for its own sake.
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them the opportunities and rewards that can satisfy those needs. Linda Connor, vice president of corporate culture at Technology Professionals Corp (TPC) in Grand Rapids, Michigan, keeps careful notes about TPC employees’ needs. She says, “I sit down at employees’ 30-day reviews and ask specific questions about hobbies and interests for each member of their families.”24 For instance, her notes about top performer Phil Mayrose indicated that he loves college football, oldies music, and, more than anything else, golf. Armed with this information, Connor and TPC rewarded Mayrose with a weekend vacation at a dude ranch with a great golf course. Connor’s notes also include ideas for helping employees deal with stress.25 So, if you want to meet employees’ needs, do what Linda Connor does and just ask. Next, satisfy lower-order needs first. Since higher-order needs will not motivate people as long as lower-order needs remain unsatisfied, companies should satisfy lower-order needs first. In practice, this means providing the equipment, training, and knowledge to create a safe workplace free of physical risks, paying employees well enough to provide financial security, and offering a benefits package that will protect employees and their families through good medical coverage and health and disability insurance. Indeed, a survey based on a representative sample of Americans found that when people choose jobs or organizations, three of the four most important factors—starting pay/salary (62 percent), employee benefits (57 percent), and job security (47 percent)—are lower-order needs.26 Third, managers should expect people’s needs to change. As some needs are satisfied or situations change, managers should expect that employees’ needs will change. In other words, what motivated people before may not motivate them now. Likewise, what motivates people to accept a job may not necessarily motivate them once they have the job. For instance, David Stum, president of the Loyalty Institute, says, “The [attractive] power of pay and benefits is only [strong] during the recruitment stage. After employees take the job, pay and benefits become entitlements to them. They think: ‘Now that I work here, you owe me that.’”27 Managers should also expect needs to change as people mature.28 For older employees benefits are as important as pay, which is always ranked as more important by younger employees. Also, older employees rank job security as more important than personal and family time, which is more important to younger employees.29 Finally, as needs change and lower-order needs are satisfied, satisfy higherorder needs by looking for ways to allow employees to experience intrinsic rewards. Recall that intrinsic rewards, such as accomplishment, achievement, learning something new, and interacting with others, are the natural rewards associated with performing a task or activity for its own sake. And, with the exception of influence (power), intrinsic rewards correspond very closely to higher-order needs that are concerned with relationships (belongingness, relatedness, and affiliation) and challenges and accomplishments (esteem, selfactualization, growth, and achievement). Therefore, one way for managers to Exhibit 13.6 meet employees’ higher-order needs is to create opportunities for employees to Motivating to Increase Effort experience intrinsic rewards by providing challenging work, encouraging employees to take greater responsibility for their work, and giving employees the freedom to pursue Start by asking people what their needs are. tasks and projects they find naturally interesting. For Satisfy lower-order needs first. example, we began this section by asking, “What would motivate an employee like Marjorie Landale Expect people’s needs to change. to voluntarily learn American Sign Language?” As needs change and lower-order needs are satisfied, Marjorie wasn’t paid to do this. In fact, she even satisfy higher-order needs by looking for ways to allow spent her own money and free time to learn how to employees to experience intrinsic rewards. sign. The reason that Marjorie learned to sign is that
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doing so met her higher-order needs. It gave her a sense of accomplishment, and it allowed her to interact with deaf customers with whom she had previously been unable to interact. And Marjorie’s boss was smart enough to encourage her to pursue a project that she found naturally interesting.
Review 1: Basics of Motivation Motivation is the set of forces that initiates, directs, and makes people persist in their efforts over time to accomplish a goal. Managers often confuse motivation and performance, but job performance is a multiplicative function of motivation times ability times situational constraints. If any one of these components is weak, job performance will suffer. Needs are the physical or psychological requirements that must be met to ensure survival and well-being. When needs are not met, people experience an internal state of tension. But, once a particular need is met, it no longer motivates. When this occurs, people become satisfied and are then motivated by other unmet needs. Different motivational theories, such as Maslow’s Hierarchy of Needs (physiological, safety, belongingness, esteem, and self-actualization), Alderfer’s ERG Theory (existence, relatedness, and growth), and McClelland’s Learned Needs Theory (affiliation, achievement, and power), specify a number of different needs. However, studies show that there are only two general kinds of needs, lower-order needs and higherorder needs, and that higher-order needs will not motivate people as long as lower-order needs remain unsatisfied. Both extrinsic and intrinsic rewards motivate people. Extrinsic rewards, which include pay, company stock, benefits, and promotions, are used to motivate people to join organizations and attend and perform their jobs. The basic model of motivation suggests that managers can motivate employees by asking them what their needs are, satisfying lower-order needs first, expecting people’s needs to change, and satisfying higher-order needs through intrinsic rewards.
How Perceptions and Expectations Affect Motivation When Jennifer Shroeger became the manager of UPS’s Buffalo, New York district, employee turnover was nearly 50 percent per year. Most of those who left were part-time workers, who make up half of UPS’s work force. It became Shroeger’s job to get them to stay. She began by asking part-time applicants what they wanted. Many of them answered, “a full-time job.” It usually takes six years of part-time work to get a full-time job driving a UPS truck, however. So Shroeger began by setting realistic expectations, telling part-time applicants that full-time work was unlikely, but that she did have good-paying part-time jobs with good benefits (health insurance and up to $23,000 in college benefits) and the flexibility to accommodate occasional days off. Next, Shroeger turned her attention to workers’ expectations about the demanding work. Most new workers were shocked and overwhelmed by the hectic pace of unloading one box every three seconds, or 1,200 an hour, typically 5,000 per night. Many never came back the next night. Many more never made it past their first week. Now trainers like Carla Wass work directly with new part-timers, explaining the job, correcting their mistakes, and encouraging them. It seems to help. Since Shroeger has focused on setting realistic expectations about rewards and the demanding nature of the job itself, employee turnover has dropped from 50 percent to just 6 percent. Moreover, hiring and recruiting costs have dropped by $1 million, the number of days lost to injury is down by 20 percent, and the percentage of packages delivered on the wrong day has dropped from 4 percent to 1 percent.30
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2 3
2
inputs In equity theory, the contributions employees make to the organization.
outcomes In equity theory, the rewards employees receive for their contributions to the organization.
referents In equity theory, others with whom people compare themselves to determine if they have been treated fairly.
Equity theory is not an absolute. It is dependent on many factors, including culture. Jaako Rytsola, pictured here with his Lamborghini, was fined $71,400 for speeding because in Finland traffic fines are based on a person’s income. People of other cultures may not have the same view of equity as the Finns!
EQUITY THEORY
Finnish businessman Jaako Rytsola was out driving in his car one evening. “The road was wide and I was feeling good. It was nice to be driving when there was no one in sight.” Unfortunately for Rytsola, he wasn’t really alone. A police officer pulled him over and issued him a speeding ticket for driving 43 miles per hour in a 25 mph zone. The cost of the ticket: $71,400! Janne Rajala, a college student, was also pulled over for driving 18 mph over the speed limit. However, Rajala’s ticket cost him only $106. The $71,294 difference occurred because Finland bases traffic fines on the severity of the offense, which was identical in this case, and the income of the driver, which clearly wasn’t. Is Finland’s method of determining speeding fines fair or unfair? Most Americans would argue that Finland’s approach is unfair, that fairness requires that fines be proportional to the offense and that everyone who breaks the law to the same degree should pay the same fine. By contrast, most Finns believe that fines proportional to income are fair. Erkki Wuouma of Finland’s Ministry of the Interior says, “This is a Nordic tradition. We have progressive taxation and progressive punishments. So the more you earn, the more you pay.” Rytsola pays more because he is a high-earning Internet entrepreneur. Rajala pays less because he’s a low-earning college student.31 Fairness, or what people perceive to be fair, is also a critical issue in organizations. Equity theory says that people will be motivated at work when they perceive that they are being treated fairly. In particular, equity theory stresses the importance of perceptions. So, regardless of the actual level of rewards people receive, they must also perceive that, relative to others, they are being treated fairly. For example, you learned in Chapter 11 that the average CEO now makes 289 times more than the average blue-collar worker.32 Many people believe that CEO pay is obscenely high and unfair. Others believe that CEO pay is fair because the supply and demand for executive talent largely determine what CEOs are paid. They argue that if it were easier to find good CEOs, then CEOs would be paid much less. As explained below, equity theory doesn’t focus on objective equity (i.e., that CEOs make 289 times more than blue-collar workers). Instead, equity theory says that equity, like beauty, is in the eye of the beholder. Let’s learn more about equity theory by examining 2.1 the components of equity theory, 2.2 how people react to perceived inequities, and 2.3 how to motivate people using equity theory.
2.1 Components of Equity Theory © AP PHOTO/SARI GUSTAFSSON/LEHTIKUVA
equity theory A theory that states that people will be motivated when they perceive that they are being treated fairly.
After reading the next two sections, you should be able to use equity theory to explain how employees’ perceptions of fairness affect motivation. use expectancy theory to describe how workers’ expectations about rewards, effort, and the link between rewards and performance influence motivation.
The basic components of equity theory are inputs, outcomes, and referents. Inputs are the contributions employees make to the organization. Inputs include education and training, intelligence, experience, effort, number of hours worked, and ability. Outcomes are the rewards employees receive in exchange for their contributions to the organization. Outcomes include pay, fringe benefits, status symbols, job titles and assignments, and even the leadership style of their superiors. And, since perceptions of equity depend on comparisons, referents are others with
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whom people compare themselves to determine if they OUTCOMESREFERENT OUTCOMESSELF have been treated fairly. Usually, people choose to 5 INPUTS INPUTSREFERENT SELF compare themselves to referents who hold the same or similar jobs or who are otherwise similar in gender, race, age, tenure, or other characteristics.33 For instance, by any objective mea- Exhibit 13.7 sure, it’s hard to argue that the best professional athletes, who make as much Outcome/Input Ratios as $30 million a year (and no doubt more by the time you read this), are treated unfairly, especially when the typical American earns $43,318 a year.34 Nonetheless, most top athletes’ contracts include escalator clauses that specify that if another top player at the same position (i.e., their referent) receives a larger contract, then their contract will automatically be increased to that amount. According to the equity theory process shown in Exhibit 13.7, employees compare their outcomes, the rewards they receive from the organization, to their inputs, their contributions to the organization. This comparison of outcomes to inputs is called the outcome/input (O/I) ratio. After an internal comparison in outcome/input (O/I) ratio which they compare their outcomes to their inputs, employees then make an In equity theory, an employee’s percepexternal comparison in which they compare their O/I ratio with the O/I ratio of a tion of how the rewards received from an organization compare with the referent.35 When people perceive that their O/I ratio is equal to the referent’s O/I employee’s contributions to that ratio, they conclude that they are being treated fairly. But, when people perceive organization. that their O/I ratio is different from their referent’s O/I ratio, they conclude that they have been treated inequitably or unfairly. Inequity can take two forms, underreward and overreward. Underreward underreward occurs when a referent’s O/I ratio is better than your O/I ratio. In other words, When the referent you compare yourthe referent you compare yourself to is getting more outcomes relative to his or self to is getting more outcomes relative to inputs than you are. her inputs than you are. When people perceive that they have been underrewarded, they tend to experience anger or frustration. For example, when a manufacturing company received notice that some important contracts had been canceled, management cut employees’ pay by 15 percent in one plant but not in another. Just as equity theory predicts, theft doubled in the plant that received the pay cut. Likewise, employee turnover increased from 5 percent to 23 percent.36 By contrast, overreward occurs when a referent’s O/I ratio is worse than your overreward O/I ratio. In this case, you are getting more outcomes relative to your inputs When you are getting more outcomes than your referent is. In theory, when people perceive that they have been relative to inputs than the referent to whom you compare yourself. overrewarded, they experience guilt. Not surprisingly, people have a very high tolerance for overreward. It takes a tremendous amount of overpayment before people decide that their pay or benefits are more than they deserve.
2.2 How People React to Perceived Inequity As a child do you ever remember calling for a do-over? Even as children, we have a strong desire for fairness, for being treated equitably. When this need isn’t met, we are strongly motivated to find a way to restore equity and be fair, hence the “do-over.” Not surprisingly, equity is just as important at the office as it is on the playground. So what happens when people perceive that they have been treated inequitably at work? Exhibit 13.8 shows that perceived inequity affects satisfaction. In the case of underreward, this usually translates into frustration or anger; with overreward, the reaction is guilt. These reactions lead to tension and a strong need to take action to restore equity in some way. At first, a slight inequity may not be strong enough to motivate an employee to take immediate action. If the inequity continues or there are multiple inequities, however, tension may build over time until a point of intolerance is reached, and the person is energized to take action.37 For example, when The Accident Group, an insurance company, laid off 2,500 employees in Manchester, Birmingham,
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Restoring Equity • Decrease inputs • Increase outcomes • Rationalize inputs or outcomes
Perceived Equity/Inequity
• Change the referent • Leave
Intrinsic Rewards Effort
Unsatisfied Need
Tension
Energized to Take Action
• Initiation • Direction
Performance
Satisfaction
• Persistence Extrinsic Rewards
Perceived Equity/Inequity
When people perceive that they have been treated inequitably at work because of the intrinsic or extrinsic rewards they receive relative to their efforts, they are dissatisfied (or frustrated or angry), their needs aren't met, and those reactions lead to tension and a strong need to take action to restore equity in some way (as explained in the “Restoring Equity” box).
Exhibit 13.8 Adding Equity Theory to the Model
and Liverpool, England, it made the announcement in an impersonal, insensitive way. Employees received three text messages on their cell phones telling them to not go into work, that their final paychecks could not be issued, and that a more thorough explanation would be provided by email. In addition, this message was left on everyone’s office voice mail: “All staff who are being retained will be contacted today. If you have not been spoken to, you are therefore being made redundant [i.e., laid off] with immediate effect.” Angry employees and managers ransacked offices, taking computers, phones, and anything else they could carry off. Claims assessor Andy Potton said, “I could hardly believe what I saw. There were people walking out of the office with computers. One chap quite high up in the company had loaded up his car with laptops and driven off.”38 When people perceive that they have been treated unfairly, they may try to restore equity by reducing inputs, increasing outcomes, rationalizing inputs or outcomes, changing the referent, or simply leaving. We will discuss these possible responses in terms of the inequity associated with underreward, which is much more common than the inequity associated with overreward. People who perceive that they have been underrewarded may try to restore equity by decreasing or withholding their inputs (i.e., effort). For example, when Iberia, the Spanish airline, was near bankruptcy seven years ago, it pressured its pilots to take substantial pay cuts. When Iberia’s finances improved, the pilots requested that the pay cuts, which had cost them $140 million, be reversed. They also asked for annual pay increases substantially higher than
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the rate of inflation. When Iberia management refused, the pilots staged a work slowdown at the peak of the busy summer tourism season. Over the course of 10 separate days throughout the summer, 30 to 40 percent of Iberia’s pilots called in sick, disrupting the airline’s flight schedule, customers, and profits.39 Increasing outcomes is another way people try to restore equity. This might include asking for a raise or pointing out the inequity to the boss and hoping that he or she takes care of it. Sometimes, however, employees may go to external organizations, such as labor unions, federal agencies, or the courts for help in increasing outcomes to restore equity. For instance, the U.S. Department of Labor estimates that 10 percent of workers are not getting the extra overtime pay they deserve when they work more than 40 hours a week.40 In fact, more than 30,000 such cases are brought each year, and employees win two-thirds of them.41 For example, the managers of Waffle House restaurants sued the company because they were working an average of 89 hours a week without any overtime pay (managers at Radio Shack and Wal-Mart have sued their companies for similar reasons).42 The company contended that as managers they were exempt from the Fair Labor Standards Act (FLSA), which mandates that workers be paid time and a half for any work beyond 40 hours a week. Because Waffle House managers were required to perform and be proficient in the duties of hourly workers in addition to their managerial responsibilities, the courts ruled that Waffle House managers were really employees who deserved overtime pay. As a result, they were awarded $2,868,841.50 in back overtime pay.43 Another method of restoring equity is to rationalize or distort inputs or outcomes. Instead of decreasing inputs or increasing outcomes, employees restore equity by making mental or emotional “adjustments” in their O/I ratios or the O/I ratios of their referents. For example, suppose that a company downsizes 10 percent of its work force. It’s likely that the survivors, the people who still have jobs, will be angry or frustrated with company management because of the layoffs. If alternative jobs are difficult to find, however, these survivors may rationalize or distort their O/I ratios and conclude, “Well, things could be worse. At least I still have my job.” Rationalizing or distorting outcomes may be used when other ways to restore equity aren’t available. Changing the referent is another way of restoring equity. In this case, people compare themselves to someone other than the referent they had been using for previous O/I ratio comparisons. Since people usually choose to compare themselves to others who hold the same or similar jobs or who are otherwise similar (i.e., friends, family members, neighbors who work at other companies), they may change referents to restore equity when their personal situations change, such as a decrease in job status or pay.44 Finally, when none of these methods—reducing inputs, increasing outcomes, rationalizing inputs or outcomes, or changing referents—are possible or restore equity, employees may leave by quitting their jobs, transferring, or increasing absenteeism.45 For example, attorneys and accountants at the Securities and Exchange Commission (SEC) quit their jobs at twice the rate of employees in other federal agencies. Why? One reason is that the SEC’s attorneys and accountants are paid 40 percent less than their counterparts at other government agencies. Furthermore, they can get jobs in the private sector that pay $180,000 to $250,000 per year.46
2.3 Motivating with Equity Theory What practical steps can managers take to use equity theory to motivate employees? As Exhibit 13.9 shows, they can start by looking for and correcting
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major inequities. Among other things, equity theory makes us aware that an employee’s sense of fairness is based on subjective perceptions. What one employee considers grossly unfair may not affect another employee’s perceptions of equity at all. Although these different perceptions make it difficult for managers to create conditions that satisfy all employees, it’s critical that they do their best to take care of major inequities that can energize employees to take disruptive, costly, or harmful actions, such as decreasing inputs or leaving. So, whenever possible, managers should look for and correct major inequities. Junior accountant Monica DiCenso supervised three auditors and regularly put in 80-hour weeks certifying the financial statements of PriceWaterhouseCoopers’ corporate clients. After receiving a $2,000 annual bonus (effectively paying her $2.86 an hour for overtime work), DiCenso quit, as did 20 of the 35 accountants who started when she did. DiCenso said, “I could have made more working at a fast-food restaurant.”47 With turnover up significantly, the Big Four accounting firms have begun addressing those inequities by paying bigger bonuses and giving junior accountants more vacation time. To help with the long hours, the firms are offering concierge services, which pick up and drop off dry cleaning and take care of other daytime tasks that workers don’t have time to do. Frequent “town hall” meetings also give junior accountants a chance to gripe to senior partners about the difficulties in their jobs. Second, managers can reduce employees’ inputs. Increasing outcomes is often the first and only strategy that companies use to restore equity, yet reducing employee inputs is just as viable a strategy. In fact, with dual-career couples working 50-hour weeks, more and more employees are looking for ways to reduce stress and restore a balance between work and family. Consequently, it may make sense to ask employees to do less, not more; to have them identify and eliminate the 20 percent of their jobs that doesn’t increase productivity or add value for customers; and to eliminate company-imposed requirements that really aren’t critical to the performance of managers, employees, or the company (e.g., unnecessary meetings and reports). In addition to the higher pay, more vacation time, concierge services, and town hall sessions mentioned above, the Big Four accounting firms are trying to make the jobs of junior accountants more equitable by reducing the hours (i.e., inputs) they must work. To shrink the workload, the firms are hiring more accountants, adding staff from other departments to help, and even actually turning away business that they lack the staff to handle. Bob Moritz, a senior partner at PriceWaterhouseCoopers, says, “The profession has recognized that we have a lot of stress in the system, and we’re doing a lot of things [to fix it].”48 Finally, managers should make sure decision-making processes are fair. Equity distributive justice theory focuses on distributive justice, the degree to which outcomes and rewards The perceived degree to which are fairly distributed or allocated. However, procedural justice, the fairness of the outcomes and rewards are fairly process used to make reward allocation decisions, is just as important.49 Procedistributed or allocated. dural justice matters because even when employees are unhappy with their procedural justice outcomes (i.e., low pay), they’re much less likely to be unhappy with company The perceived fairness of the process management if they believe that the procedures used to allocate outcomes were used to make reward allocation fair. For example, employees who are laid off tend to be hostile toward their decisions. employer when they perceive that the procedures leading to the layoffs were unExhibit 13.9 fair. By contrast, employees who perceive layoff procedures to be fair tend to Motivating with Equity Theory continue to support and trust their employers.50 Also, if employees perceive that their outcomes are unfair • Look for and correct major inequities. (i.e., distributive injustice), but that the decisions and • Reduce employees’ inputs. procedures leading to those outcomes were fair (i.e., procedural justice), they are much more likely to • Make sure decision-making processes are fair. seek constructive ways of restoring equity, such as
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discussing these matters with their manager. In contrast, if employees perceive both distributive and procedural injustice, they may resort to more destructive tactics, such as withholding effort, absenteeism, tardiness, or even sabotage and theft.51
Review 2: Equity Theory The basic components of equity theory are inputs, outcomes, and referents. After an internal comparison in which employees compare their outcomes to their inputs, they then make an external comparison in which they compare their O/I ratio with the O/I ratio of a referent, a person who works in a similar job or is otherwise similar. When their O/I ratio is equal to the referent’s O/I ratio, employees perceive that they are being treated fairly. But, when their O/I ratio is different from their referent’s O/I ratio, they perceive that they have been treated inequitably or unfairly. There are two kinds of inequity, underreward and overreward. Underreward, which occurs when a referent’s O/I ratio is better than the employee’s O/I ratio, leads to anger or frustration. Overreward, which occurs when a referent’s O/I ratio is worse than the employee’s O/I ratio, can lead to guilt, but only when the level of overreward is extreme. When employees perceive that they have been treated inequitably (i.e., underreward), they may try to restore equity by reducing inputs, increasing outcomes, rationalizing inputs or outcomes, changing the referent, or simply leaving. Managers can use equity theory to motivate workers by looking for and correcting major inequities, reducing employees’ inputs, and emphasizing procedural as well as distributive justice. 3
EXPECTANCY THEORY
How attractive do you find each of the following rewards? A company concierge service that will pick up your car from the mechanic and send someone to be at your house when the cable guy or repair person shows up. A “7 to 7” travel policy that stipulates that no one has to leave home for business travel before 7 A.M. on Mondays and that everyone should be home from business travel by 7 P.M. on Fridays. The opportunity to telecommute so that you can feed your kids breakfast, pick them up after school, and tuck them into bed at night.52 If you have kids, you might love the chance to telecommute; but if you don’t, you may not be interested. If you don’t travel much on business, you won’t be interested in the “7 to 7” travel policy; but if you do, you’ll probably love it. One of the hardest things about motivating people is that rewards that are attractive to some employees are unattractive to others. Expectancy theory says that people will be motivated to the extent to which they believe that their efforts will lead to good performance, that good performance will be rewarded, and that they will be offered attractive rewards.53 Let’s learn more about expectancy theory by examining 3.1 the components of expectancy theory and 3.2 how to use expectancy theory as a motivational tool.
expectancy theory A theory that states that people will be motivated to the extent to which they believe that their efforts will lead to good performance, that good performance will be rewarded, and that they will be offered attractive rewards.
3.1 Components of Expectancy Theory Expectancy theory holds that people make conscious choices about their motivation. The three factors that affect those choices are valence, expectancy, and instrumentality. Valence is simply the attractiveness or desirability of various rewards or outcomes. Expectancy theory recognizes that the same reward or outcome, say, a promotion, will be highly attractive to some people, will be highly disliked by others, and will not make much difference one way or the other to still others.
valence The attractiveness or desirability of a reward or outcome.
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expectancy The perceived relationship between effort and performance.
instrumentality The perceived relationship between performance and rewards.
Accordingly, when people are deciding how much effort to put forth, expectancy theory says that they will consider the valence of all possible rewards and outcomes that they can receive from their jobs. The greater the sum of those valences, each of which can be positive, negative, or neutral, the more effort people will choose to put forth on the job. Expectancy is the perceived relationship between effort and performance. When expectancies are strong, employees believe that their hard work and efforts will result in good performance, so they work harder. By contrast, when expectancies are weak, employees figure that no matter what they do or how hard they work, they won’t be able to perform their jobs successfully, so they don’t work as hard. Instrumentality is the perceived relationship between performance and rewards. When instrumentality is strong, employees believe that improved performance will lead to better and more rewards, so they choose to work harder. When instrumentality is weak, employees don’t believe that better performance will result in more or better rewards, so they choose not to work as hard. Expectancy theory holds that for people to be highly motivated, all three variables—valence, expectancy, and instrumentality—must be high. Thus, expectancy theory can be represented by the following simple equation: Motivation = Valence 3 Expectancy 3 Instrumentality
Exhibit 13.10 Adding Expectancy Theory to the Model
If any one of these variables (valence, expectancy, or instrumentality) declines, overall motivation will decline, too. Exhibit 13.10 incorporates the expectancy theory variables into our motivation model. Valence and instrumentality combine to affect employees’ willingness
Restoring Equity • Decrease inputs Perceived Equity/Inequity
• Increase outcomes • Rationalize inputs or outcomes • Change the referent • Leave
Intrinsic Rewards Effort
Unsatisfied Need
Energized to Take Action
Tension
Valence
• Initiation • Direction
Performance
Satisfaction
• Persistence
Instrumentality
Expectancy
Extrinsic Rewards
Perceived Equity/Inequity
If rewards are attractive (valence) and linked to performance (instrumentality), then people are energized to take action. In other words, good performance gets them rewards that they want. Intended effort (i.e., energized to take action) turns into actual effort when people believe that their hard work and efforts will result in good performance. After all, why work hard if that hard work is wasted?
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to put forth effort (i.e., the degree to which they are energized to take action), while expectancy transforms intended effort (“I’m really going to work hard in this job”) into actual effort. If you’re offered rewards that you desire and you believe that you will in fact receive these rewards for good performance, you’re highly likely to be energized to take action. However, you’re not likely to actually exert effort unless you also believe that you can do the job (i.e., that your efforts will lead to successful performance). Caribou Coffee, which has 220 stores in Minnesota, Wisconsin, Illinois, Ohio, Georgia, North Carolina, Michigan, Maryland, and Virginia, integrates valence, expectancy, and instrumentality into its employee motivation program.54 First, Caribou offers a wide variety of rewards, such as employee recognition programs, sales incentives, and company-wide contests, so that all of its employees can receive highly valent rewards that they desire. The company manages employee expectancies by using its “Coffee College” to provide substantial training to new hires and continuing education for longtime employees. Caribou’s director of training, Annmarie Lofy, says that the program sets new employees up for success from the beginning. When they start their new jobs, they’re not nervous and unsure because the training has prepared them to do their jobs well. Finally, Caribou manages instrumentality by linking various rewards to the specific behaviors it wants to reward. In one such program, store employees receive “Bou Bucks” from store managers for performance above and beyond their job descriptions. Bou Bucks are redeemable for merchandise at stores such as Marshall Fields and Foot Locker. One reason Bou Bucks have had such a strong effect on instrumentality perceptions is that Caribou Coffee managers award them immediately when they see employees performing their jobs well. This strengthens employees’ perceptions that performance is instrumental to receiving rewards.55
Caribou Coffee is a growing specialty coffee retailer that integrates expectancy theory into its management practices. New hires spend time at “Coffee College” to learn Caribou’s processes. That way, new employees are set up for success from the beginning.
3.2 Motivating with Expectancy Theory What practical steps can managers take to use expectancy theory to motivate employees? First, as Exhibit 13.11 shows, they can systematically gather information to find out what employees want from their jobs. In addition to individual managers directly asking employees what they want from their jobs (see Subsection 1.4 “Motivating with the Basics”), companies need to survey their employees regularly to determine their wants, needs, and dissatisfactions. Since people consider the valence of all the possible rewards and outcomes that they can receive from their jobs, regular identification of wants, needs, and dissatisfactions gives companies the chance to turn negatively valent rewards and outcomes into positively valent rewards and outcomes, thus raising overall Exhibit 13.11 motivation and effort. Marc Albin, CEO of Albin Engineering, says, “My Motivating with Expectancy Theory experience in managing people is, they’re all different. Some people want to be recognized for their • Systematically gather information to find out what cheerful attitude and their ability to spread their employees want from their jobs. cheerful attitude. Some want to be recognized for • Take specific steps to link rewards to individual the quality of their work, some for the quantity of performance in a way that is clear and understandable to their work. Some like to be recognized individually; employees. others want to be recognized in groups.”56 There• Empower employees to make decisions if management fore, at the end of each employee orientation session really wants them to believe that their hard work and effort (during the first week on the job), he asks new will lead to good performance. employees to identify the rewards they want. The
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new employees appreciate his interest in what they want or need. Says Albin, “No one has ever said, ‘Just recognize me for anything I do well.’”57 Second, managers can take specific steps to link rewards to individual performance in a way that is clear and understandable to employees. Unfortunately, most employees are extremely dissatisfied with the link between pay and performance in their organizations. A study based on a representative sample found that 80 percent of employees wanted to be paid according to a different kind of pay system! Moreover, only 32 percent of employees were satisfied with how their annual pay raises were determined, and only 22 percent were happy with the way the starting salaries for their jobs were determined.58 One way to make sure that employees see the connection between pay and performance (see Chapter 11 for a discussion of compensation strategies) is for managers to publicize the way in which pay decisions are made. This is especially important given that only 41 percent of employees know how their pay increases are determined.59 For example, at Allstate Insurance, the company compensation team wrote a pamphlet called “Tracking the Clues to Your Pay,” which explained how Allstate carefully uses market value surveys and analyses to determine employee pay. Making this explanation available helped counter the widespread belief that employee pay was determined in some random way. When asked, “To what extent does the pay system competitively reward you for results?” 27 percent more Allstate employees responded “A great deal” or “Quite a bit” after the publication of the pamphlet.60 Finally, managers should empower employees to make decisions if management really wants them to believe that their hard work and effort will lead to good performance. If valent rewards are linked to good performance, people should be energized to take action. However, this works only if they also believe that their efforts will lead to good performance. One of the ways that managers destroy the expectancy that hard work and effort will lead to good performance is by restricting what employees can do or by ignoring employees’ ideas. In Chapter 9, you learned that empowerment is a feeling of intrinsic motivation, in which workers perceive their work to have meaning and perceive themselves to be competent, to have an impact, and to be capable of self-determination.61 So, if managers want workers to have strong expectancies, they should empower them to make decisions. Doing so will motivate employees to take active rather than passive roles in their work.
Review 3: Expectancy Theory Expectancy theory holds that three factors affect the conscious choices people make about their motivation: valence, expectancy, and instrumentality. Valence is simply the attractiveness or desirability of various rewards or outcomes. Expectancy is the perceived relationship between effort and performance. Instrumentality is the perceived relationship between performance and rewards. Expectancy theory holds that for people to be highly motivated, all three factors must be high. If any one of these factors declines, overall motivation will decline, too. Managers can use expectancy theory to motivate workers by systematically gathering information to find out what employees want from their jobs, by linking rewards to individual performance in a way that is clear and understandable to employees, and by empowering employees to make decisions, which will increase their expectancies that hard work and effort will lead to good performance.
How Rewards and Goals Affect Motivation When used properly, rewards motivate and energize employees. But when used incorrectly, they can demotivate, baffle, and even anger them. For example, consider the dotcom company that gave every employee a plaque for “outstanding
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performance.” Then it compounded that mistake (How can every employee be “outstanding?”) by firing one of those “outstanding” employees, James Finkel, two weeks after awarding him his plaque. Said Finkel, “My reward for outstanding performance was getting canned. I left the plaque sitting on my desk.”62 Goals are also supposed to motivate employees. But leaders who focus blindly on meeting goals at all costs often find that they destroy motivation. For instance, a president of a technology company calls his vice president of sales daily and asks, “Did you make your numbers today?” Consultant Richard Hapburg, who works with the vice president who receives these daily calls, says that the VP should be focusing on long-term solutions that increase sales, but “he’s under enormous pressure to meet certain sales and profit targets on a daily basis now.” The clear danger to using goals in this way, says Hapburg, is “that it’s hard to capture employees’ hearts, and best efforts, with numbers alone.”63 4 5 6
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After reading the next three sections, you should be able to explain how reinforcement theory works and how it can be used to motivate. describe the components of goal-setting theory and how managers can use them to motivate workers. discuss how the entire motivation model can be used to motivate workers.
REINFORCEMENT THEORY
Reinforcement theory says that behavior is a function of its consequences, that behaviors followed by positive consequences (i.e., reinforced) will occur more frequently, and that behaviors followed by negative consequences, or not followed by positive consequences, will occur less frequently.64 Therefore, to improve its safety record, Monsanto decided to reinforce safe behaviors. Chuck Davis, a safety consultant, says, “It’s better to recognize a guy for success than beat him up for failure. It’s amazing how little reward a guy needs so he doesn’t stick his arm in a machine.”65 More specifically, reinforcement is the process of changing behavior by changing the consequences that follow behavior.66 Reinforcement has two parts: reinforcement contingencies and schedules of reinforcement. Reinforcement contingencies are the cause-and-effect relationships between the performance of specific behaviors and specific consequences. For example, if you get docked an hour’s pay for being late to work, then a reinforcement contingency exists between a behavior, being late to work, and a consequence, losing an hour’s pay. A schedule of reinforcement is the set of rules regarding reinforcement contingencies, such as which behaviors will be reinforced, which consequences will follow those behaviors, and the schedule by which those consequences will be delivered.67 Exhibit 13.12 incorporates reinforcement contingencies and reinforcement schedules into our motivation model. First, notice that extrinsic rewards and the schedules of reinforcement used to deliver them are the primary method for creating reinforcement contingencies in organizations. In turn, those reinforcement contingencies directly affect valences (the attractiveness of rewards), instrumentality (the perceived link between rewards and performance), and effort (how hard employees will work).
Let’s learn more about reinforcement theory by examining 4.1 the components of reinforcement theory, 4.2 the different schedules for delivering reinforcement, and 4.3 how to motivate with reinforcement theory.
4.1 Components of Reinforcement Theory As just described, reinforcement contingencies are the cause-and-effect relationships between the performance of specific behaviors and specific consequences.
reinforcement theory A theory that states that behavior is a function of its consequences, that behaviors followed by positive consequences will occur more frequently, and that behaviors followed by negative consequences, or not followed by positive consequences, will occur less frequently.
reinforcement The process of changing behavior by changing the consequences that follow behavior.
reinforcement contingencies Cause-and-effect relationships between the performance of specific behaviors and specific consequences.
schedule of reinforcement Rules that specify which behaviors will be reinforced, which consequences will follow those behaviors, and the schedule by which those consequences will be delivered.
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Restoring Equity • Decrease inputs Perceived Equity/Inequity
• Increase outcomes • Rationalize inputs or outcomes • Change the referent • Leave
Intrinsic Rewards Effort
Unsatisfied Need
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Energized to Take Action
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• Initiation • Direction
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Satisfaction
• Persistence
Instrumentality
Expectancy
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Perceived Equity/Inequity
Schedules of Reinforcement
Extrinsic rewards and the schedules of reinforcement used to deliver them are the primary method for creating reinforcement contingencies in organizations. In turn, those reinforcement contingencies directly affect valences (the attractiveness of rewards), instrumentality (the perceived link between rewards and performance), and effort (how hard employees will work).
Reinforcement that strengthens behavior by following behaviors with desirable consequences.
There are four kinds of reinforcement contingencies: positive reinforcement, negative reinforcement, punishment, and extinction. Positive reinforcement strengthens behavior (i.e., increases its frequency) by following behaviors with desirable consequences. Harry Kraemer, the CEO of Baxter International, a pharmaceutical firm, included this story about his fouryear-old son in Baxter’s company newsletter to illustrate the power of incentives and positive reinforcement:
negative reinforcement
He had got a hold of his sister’s bead set and he somehow got one of them stuck up his nose. He tried to get it out, and the thing kept getting higher up his nose. I got him in the car to take him to the emergency room, and right as I was getting ready to park I said to him, “Andrew, Daddy loves you a lot. We’ve got to get this thing out. If we go to the emergency room, this is going to cost Dad about $150. But here’s the deal: If you can figure out a way to blow that out of your nose [the goal], first, we’ll go to Blockbuster and you can buy any tape you want. And second, we’ll go to Bakers Square, and you and I will split a French silk pie [the positive rewards].” Well, he blew the thing out, and it almost cracked my windshield.68
Reinforcement that strengthens behavior by withholding an unpleasant consequence when employees perform a specific behavior.
Negative reinforcement strengthens behavior by withholding an unpleasant consequence when employees perform a specific behavior. Negative reinforcement is also called avoidance learning because workers perform a behavior to
Exhibit 13.12 Adding Reinforcement Theory to the Model
positive reinforcement
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avoid a negative consequence. For example, at the Florist Network, a small business in Buffalo, New York, company management instituted a policy of requiring good attendance for employees to receive their annual bonuses. Employee attendance has improved significantly now that excessive absenteeism can result in the loss of $1,500 or more, depending on the size of the bonus.69 By contrast, punishment weakens behavior (i.e., decreases its frequency) by following behaviors with undesirable consequences. For example, the standard disciplinary or punishment process in most companies is an oral warning (“Don’t ever do that again.”), followed by a written warning (“This letter is to discuss the serious problem you’re having with . . . ”), followed by three days off without pay (“While you’re at home not being paid, we want you to think hard about . . . ”), followed by being fired (“This was your last chance. You’re fired.”). Though punishment can weaken behavior, managers have to be careful to avoid the backlash that sometimes occurs when employees are punished at work. For example, Frito-Lay began getting complaints from customers that they were finding potato chips with obscene messages written on them. FritoLay eventually traced the problem to a potato chip plant where supervisors had fired 58 out of the 210 workers for disciplinary reasons over a nine-month period. The remaining employees were so angry over what they saw as unfair treatment from management that they began writing obscene phrases on potato chips with felt-tipped pens.70 Extinction is a reinforcement strategy in which a positive consequence is no longer allowed to follow a previously reinforced behavior. By removing the positive consequence, extinction weakens the behavior, making it less likely to occur. Based on the idea of positive reinforcement, most companies give company leaders and managers substantial financial rewards when the company performs well. Based on the idea of extinction, you would then expect that leaders and managers would not be rewarded (i.e., removing the positive consequence) when companies perform poorly. If companies really want pay to reinforce the right kinds of behaviors, then rewards have to be removed when company management doesn’t produce successful performance. For example, with a $1 billion loss, sales down 28 percent, and the stock price down 35 percent, Agilent’s board of directors cut CEO Ned Barnholt’s base pay by 10 percent and didn’t award him a cash or stock bonus. Said Barnholt, “I don’t expect anything different. If the company doesn’t perform, I shouldn’t be getting any rewards.”71 By contrast, even though the Walt Disney Company’s income dropped from $1.9 billion to $1.4 billion in four years, Disney rewarded CEO Michael Eisner with a large increase in salary, 2 million stock options worth $37.7 million, a $5 million restricted stock bonus, and an $11.5 million cash bonus.72
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punishment Reinforcement that weakens behavior by following behaviors with undesirable consequences.
extinction Reinforcement in which a positive consequence is no longer allowed to follow a previously reinforced behavior, thus weakening the behavior.
4.2 Schedules for Delivering Reinforcement As mentioned earlier, a schedule of reinforcement is the set of rules regarding reinforcement contingencies, such as which behaviors will be reinforced, which consequences will follow those behaviors, and the schedule by which those consequences will be delivered. There are two categories of reinforcement schedules: continuous and intermittent. With continuous reinforcement schedules, a consequence follows every instance of a behavior. For example, employees working on a piece-rate pay system earn money (consequence) for every part they manufacture (behavior). The more they produce, the more they earn. By contrast, with intermittent reinforcement schedules, consequences are delivered after a specified or average time has elapsed or after a specified or average number of behaviors has occurred. As Exhibit 13.13 shows, there are four types of intermittent reinforcement schedules. Two of these are based on time and are called interval reinforcement schedules, while the other two, known as ratio schedules, are based on behaviors.
continuous reinforcement schedule A schedule that requires a consequence to be administered following every instance of a behavior.
intermittent reinforcement schedule A schedule in which consequences are delivered after a specified or average time has elapsed or after a specified or average number of behaviors has occurred.
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INTERMITTENT REINFORCEMENT SCHEDULES FIXED
VARIABLE
INTERVAL (TIME)
Consequences follow behavior after a fixed time has elapsed.
Consequences follow behavior after different times, some shorter and some longer, that vary around a specific average time.
RATIO (BEHAVIOR)
Consequences follow a specific number of behaviors.
Consequences follow a different number of behaviors, sometimes more and sometimes less, that vary around a specified average number of behaviors.
Exhibit 13.13 Intermittent Reinforcement Schedules
fixed interval reinforcement schedule An intermittent schedule in which consequences follow a behavior only after a fixed time has elapsed.
variable interval reinforcement schedule An intermittent schedule in which the time between a behavior and the following consequences varies around a specified average.
fixed ratio reinforcement schedule An intermittent schedule in which consequences are delivered following a specific number of behaviors.
variable ratio reinforcement schedule An intermittent schedule in which consequences are delivered following a different number of behaviors, sometimes more and sometimes less, that vary around a specified average number of behaviors.
With fixed interval reinforcement schedules, consequences follow a behavior only after a fixed time has elapsed. For example, most people receive their paychecks on a fixed interval schedule (e.g., once or twice per month). As long as they work (behavior) during a specified pay period (interval), they get a paycheck (consequence). With variable interval reinforcement schedules, consequences follow a behavior after different times, some shorter and some longer, that vary around a specified average time. On a 90-day variable interval reinforcement schedule, you might receive a bonus after 80 days or perhaps after 100 days, but the average interval between performing your job well (behavior) and receiving your bonus (consequence) would be 90 days. With fixed ratio reinforcement schedules, consequences are delivered following a specific number of behaviors. For example, a car salesperson might receive a $1,000 bonus after every 10 sales. Therefore, a salesperson with only 9 sales would not receive the bonus until he or she finally sold a 10th car. With variable ratio reinforcement schedules, consequences are delivered following a different number of behaviors, sometimes more and sometimes less, that vary around a specified average number of behaviors. With a 10-car variable ratio reinforcement schedule, a salesperson might receive the bonus after 7 car sales, or after 12, 11, or 9 sales, but the average number of cars sold before receiving the bonus would be 10 cars. Students often have trouble envisioning how these schedules can actually be used in work settings, so a couple of examples will help. In a study designed to increase employee attendance, employees who came to work participated in an innovative variable ratio schedule in which they drew a card from a deck of playing cards every day they came to work. At the end of each week, the employee with the best poker hand from those cards received a $20 bonus.73 In another variable reinforcement system, Electric Boat, which builds nuclear submarines, uses a lottery that gives workers with good attendance a chance to win sizable rewards. Eligibility for the various rewards depends on the level of attendance. For example, 933 workers with two years of perfect attendance were placed in a lottery where 20 of them would win $2,500. Likewise, 1,400 workers with a year of perfect attendance were placed in a lottery where 75 would win $1,000, 50 would win $500, 25 would win prime parking spaces, and all would win a $25 gift certificate for the company store. Greg Angelini, who won a $1,000 prize, said, “I’m not a gambler, but it sure was nice to get that check right before Christmas. And, it was just as nice that the powers that be noticed that I’ve had perfect attendance.”74 Electric Boat’s lottery system is so rewarding that on average an amazing 41 percent of its workers have perfect attendance. Which reinforcement schedules work best? In the past, the standard advice was to use continuous reinforcement when employees were learning new behaviors because reinforcement after each success leads to faster learning. Likewise, the standard advice was to use intermittent reinforcement schedules to maintain behavior after it is learned because intermittent rewards are supposed to make
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behavior much less subject to extinction.75 Research shows, however, that except for interval-based systems, which usually produce weak results, the effectiveness of continuous reinforcement, fixed ratio, and variable ratio schedules differs very little.76 In organizational settings, all three produce consistently large increases over noncontingent reward schedules. So managers should choose whichever of these three is easiest to use in their companies.
4.3 Motivating with Reinforcement Theory What practical steps can managers take to use reinforcement theory to motivate employees? Professor Fred Luthans, who has been studying the effects of reinforcement theory in organizations for more than a quarter of a century, says that there are five steps to motivating workers with reinforcement theory: identify, measure, analyze, intervene, and evaluate critical performance-related behaviors.77 Identify means identifying critical, observable, performance-related behaviors. These are the behaviors that are most important to successful job performance. In addition, they must also be easily observed so that they can be accurately measured. Measure means measuring the baseline frequencies of these behaviors. In other words, find out how often workers perform them. Analyze means analyzing the causes and consequences of these behaviors. Analyzing the causes helps managers create the conditions that produce these critical behaviors, and analyzing the consequences helps them determine if these behaviors produce the results that they want. Intervene means changing the organization by using positive and negative reinforcement to increase the frequency of these critical behaviors. Evaluate means evaluating the extent to which the intervention actually changed workers’ behavior. This is done by comparing behavior after the intervention to the original baseline of behavior before the intervention. For more on the effectiveness of reinforcement theory, see the “What Really Works?” feature in this chapter. In addition to these five steps, Exhibit 13.14 lists three other things that managers should remember when motivating with reinforcement theory. Don’t reinforce the wrong behaviors. Although reinforcement theory sounds simple, it’s actually very difficult to put into practice. One of the most common mistakes is accidentally reinforcing the wrong behaviors. In fact, sometimes managers reinforce behaviors that they don’t want! For example, the salary and bonus system was not working correctly at Discovery Communications, which runs the Discovery Channel on cable and satellite TV. Within the same job classifications, top performers’ salaries were the same as poor performers’ salaries. Also, people doing identical jobs, but in different locations, were paid very differently. Because the company’s reward system did not allow managers to give large raises to people who stayed in the same job from year to year, managers used promotions to get workers higher pay and keep them in the company. The system was so rigid, however, that they frequently promoted good workers before they were ready or promoted them into jobs for which they weren’t qualified. Likewise, employees campaigned to be transferred to locations that paid undeservedly higher salaries. Mark Kozak, senior vice president for administration and opera- Exhibit 13.14 tions, said, “People felt that it was unfair.”78 Motivating with Reinforcement Theory Managers should also correctly administer punishment at the appropriate time. Many managers • Identify, measure, analyze, intervene, and evaluate critical believe that punishment can change workers’ behavperformance-related behaviors. ior and help them improve their job performance. • Don’t reinforce the wrong behaviors. Furthermore, managers believe that fairly punishing workers also lets other workers know what is or isn’t • Correctly administer punishment at the appropriate time. acceptable.79 A danger of using punishment is that it • Choose the simplest and most effective schedules of can produce a backlash against managers and comreinforcement. panies, but if administered properly, punishment can
W H A T
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Financial, Nonfinancial, and Social Rewards Throughout this chapter, we have been making the point that there is more to motivating people than money. But we haven’t yet examined how well financial (money or prizes), nonfinancial (performance feedback), or social (recognition and attention) rewards motivate workers by themselves or in combination. However, the results of two meta-analyses, one with 19 studies based on more than 2,800 people (study 1) and another based on 72 studies and 13,301 people (study 2), clearly indicate that rewarding and reinforcing employees greatly improve motivation and performance, especially when combined. FINANCIAL REWARDS
On average, there is an 68 percent chance that employees whose behavior is reinforced with financial rewards will outperform employees whose behavior is not reinforced. This increases to 84 percent in manufacturing organizations but drops to 61 percent in service organizations. Probability of Success 10%
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On average, there is a 61 percent chance that employees whose behavior is reinforced with a combination of nonfinancial and social rewards will outperform employees whose behavior is not reinforced.
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On average, there is an 58 percent chance that employees whose behavior is reinforced with nonfinancial rewards will outperform employees whose behavior is not reinforced. This increases to 87 percent in manufacturing organizations but drops to 54 percent in service organizations.
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FINANCIAL, NONFINANCIAL, AND SOCIAL REWARDS
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weaken the frequency of undesirable behaviors without creating a backlash.81 To be effective, the punishment must be strong enough to stop the undesired behavior and must be administered objectively (same rules applied to everyone), impersonally (without emotion or anger), consistently and contingently (each time improper behavior occurs), and quickly (as soon as possible following the undesirable behavior). In addition, managers should clearly explain what the appropriate behavior is and why the employee is being punished. Employees typically respond well when punishment is administered this way.82 Finally, managers should choose the simplest and most effective schedule of reinforcement. When choosing a schedule of reinforcement, managers need to balance effectiveness against simplicity. In fact, the more complex the schedule of reinforcement, the more likely it is to be misunderstood and resisted by managers and employees. For example, a forestry and logging company experimented with a unique variable ratio schedule. When tree-planters finished planting a bag of seedlings (about 1,000 seedlings per bag), they got to flip a coin. If they called the coin flip correctly (heads or tails), they were paid $4, double the regular rate of $2 per bag. If they called the coin flip incorrectly, they got nothing. The company began having problems when several workers and a manager, who was a parttime minister, claimed that the coin flip was a form of gambling. Then, another worker found that the company was taking out too much money for taxes from workers’ paychecks. Since the workers didn’t really understand the reinforcement schedule, they blamed the payment plan associated with it and accused the company of trying to cheat them out of their money. After all of these problems, the researchers who implemented the variable ratio schedule concluded that “the results of this study may not be so much an indication of the relative effectiveness of different schedules of reinforcement as they are an indication of the types of problems that one encounters when applying these concepts in an industrial setting.”83 In short, choose the simplest, most effective schedule of reinforcement. Since continuous reinforcement, fixed ratio, and variable ratio schedules are about equally effective, continuous reinforcement schedules may be the best choice in many instances by virtue of their simplicity.
Review 4: Reinforcement Theory Reinforcement theory says that behavior is a function of its consequences. Reinforcement has two parts: reinforcement contingencies and schedules of reinforcement. The four kinds of reinforcement contingencies are positive reinforcement and negative reinforcement, which strengthen behavior, and punishment and extinction, which weaken behavior. There are two kinds of reinforcement schedules, continuous and intermittent; intermittent schedules, in turn, can be divided into fixed and variable interval schedules and fixed and variable ratio schedules. Managers can use reinforcement theory to motivate workers by following five steps (identify, measure, analyze, intervene, and evaluate critical performancerelated behaviors); not reinforcing the wrong behaviors; correctly administering punishment at the appropriate time; and choosing a reinforcement schedule, such as continuous reinforcement, that balances simplicity and effectiveness. 5
GOAL-SETTING THEORY
The basic model of motivation with which we began this chapter showed that individuals feel tension after becoming aware of an unfulfilled need. Once they experience tension, they search for and select courses of action that they believe will eliminate this tension. In other words, they direct their behavior toward something. This something is a goal. A goal is a target, objective, or result that someone tries to accomplish. For example, one of the goals of discount airline JetBlue is that all the baggage on a plane be delivered to the baggage pickup area no later than 20 minutes after the plane reaches the gate. Why? Because,
goal A target, objective, or result that someone tries to accomplish.
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JetBlue CEO David Neeleman insists that all baggage be delivered to the claim area within 20 minutes of an airplane’s arrival. Neeleman is shown here working with the baggage-handling crew to meet this goal.
goal-setting theory A theory that states that people will be motivated to the extent to which they accept specific, challenging goals and receive feedback that indicates their progress toward goal achievement.
goal specificity The extent to which goals are detailed, exact, and unambiguous.
goal difficulty The extent to which a goal is hard or challenging to accomplish.
goal acceptance The extent to which people consciously understand and agree to goals.
performance feedback Information about the quality or quantity of past performance that indicates whether progress is being made toward the accomplishment of a goal.
as President Dave Barger explains, “The 45 minutes you wait for your bags is your last impression,” and a strongly negative one at that.84 JetBlue also has specific goals for completion rate (the percentage of flights that aren’t canceled) and ontime arrivals. Last year, JetBlue was first and second, respectively, in the industry in those areas. Goal-setting theory says that people will be motivated to the extent to which they accept specific, challenging goals and receive feedback that indicates their progress toward goal achievement. Let’s learn more about goal setting by examining 5.1 the components of goal-setting theory and 5.2 how to motivate with goal-setting theory.
5.1 Components of Goal-Setting Theory The basic components of goal-setting theory are goal specificity, goal difficulty, goal acceptance, and performance feedback.85 Goal specificity is the extent to which goals are detailed, exact, and unambiguous. Specific goals, such as “I’m going to have a 3.0 average this semester,” are more motivating than general goals, such as “I’m going to get better grades this semester.” Goal difficulty is the extent to which a goal is hard or challenging to accomplish. Difficult goals, such as “I’m going to have a 3.5 average and make the Dean’s List this semester,” are more motivating than easy goals, such as “I’m going to have a 2.0 average this semester.” Goal acceptance, which is similar to the idea of goal commitment discussed in Chapter 5, is the extent to which people consciously understand and agree to goals. Accepted goals, such as “I really want to get a 3.5 average this semester to show my parents how much I’ve improved,” are more motivating than unaccepted goals, such as “My parents really want me to get a 3.5 average this semester, but there’s so much more I’d rather do on campus than study!” Performance feedback is information about the quality or quantity of past performance and indicates whether progress is being made toward the accomplishment of a goal. Performance feedback, such as “My prof said I need a 92 on the final to get an ‘A’ in that class,” is more motivating than no feedback, “I have no idea what my grade is in that class.” In short, goal-setting theory says that people will be motivated to the extent to which they accept specific, challenging goals and receive feedback that indicates their progress toward goal achievement. How does goal setting work? To start, challenging goals focus employees’ attention (i.e., direct effort) on the critical aspects of their jobs and away from unimportant areas. Goals also energize behavior. When faced with unaccomplished goals, employees typically develop plans and strategies to reach those goals. Goals also create tension between the goal, which is the desired future state of affairs, and where the employee or company is now, meaning the current state of affairs. This tension can be satisfied only by achieving or abandoning the goal. Finally, goals influence persistence. Since goals only “go away” when they are accomplished, employees are more likely to persist in their efforts in the presence of goals. Exhibit 13.15 incorporates goals into the motivation model by showing how goals directly affect tension, effort, and the extent to which employees are energized to take action.
5.2 Motivating with Goal-Setting Theory What practical steps can managers take to use goal-setting theory to motivate employees? Exhibit 13.16 lists three suggestions beginning with assign specific,
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Restoring Equity • Decrease inputs Perceived Equity/Inequity
• Increase outcomes • Rationalize inputs or outcomes • Change the referent • Leave
Intrinsic Rewards
Goals Effort Unsatisfied Need
Energized to Take Action
Tension
Valence
• Initiation
Performance
• Direction
Satisfaction
• Persistence
Instrumentality
Expectancy
Reinforcement Contingencies
Extrinsic Rewards
Perceived Equity/Inequity
Schedules of Reinforcement Goals create tension between the goal, which is the desired future state of affairs, and where the employee or company is now, meaning the current state of affairs. This tension can be satisfied only by achieving or abandoning the goal. Goals also energize behavior. When faced with unaccomplished goals, employees typically develop plans and strategies to reach those goals. Finally, goals influence persistence.
Exhibit 13.15
challenging goals. One of the simplest, most effective ways to motivate workers is to give them specific, challenging goals. For example, although CDW (Computer Discount Warehouse) offers fantastic benefits and rewards, senior publicist Gary Ross says, “It’s not a cushy place to work.” According to vice president Art Friedson, CDW sets company-wide “Big Hairy Aggressive Goals,” such as “A Million for a Billion,” in which everyone in the company would split $1 million in bonuses (about $500 per employee at the time) when CDW booked $1 billion in annual sales.86 With that accomplished, the next BHAG was $3 billion in annual sales with a payout of $5 million in bonuses (about $2,500 per employee at the time). And, with that accomplished, the BHAG is now $10 billion in annual sales (sales were $5.7 billion last year). For more information on assigning specific, challenging goals, see the discussion in Chapter 5 on S.M.A.R.T. goals. Second, managers should make sure workers truly accept organizational goals. Specific, challenging goals won’t motivate workers unless they really accept, understand, and agree to the organization’s goals. For this to occur, people must see the goals as fair and reasonable. Plus, they must trust management and believe that managers are using goals to clarify what is expected from them rather than to exploit or threaten them (“If you don’t achieve these
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goals . . . ”). Participative goal setting, in which managers and employees generate goals together, • Make sure workers truly accept organizational goals. can help increase trust and understanding and thus acceptance of goals. Furthermore, providing work• Provide frequent, specific, performance-related feedback. ers with training can help increase goal acceptance, particularly when workers don’t believe they are Exhibit 13.16 capable of reaching the organization’s goals.87 Motivating with Goal-Setting Theory Finally, managers should provide frequent, specific, performance-related feedback. Once employees have accepted specific, challenging goals, they should receive frequent performance-related feedback so that they can track their progress toward goal completion. Feedback leads to stronger motivation and effort in three ways.88 Receiving specific feedback that indicates how well they’re performing can encourage employees who don’t have specific, challenging goals to set goals to improve their performance. Once people meet goals, performance feedback often encourages them to set higher, more difficult goals. And, feedback lets people know whether they need to increase their efforts or change strategies in order to accomplish their goals. For example, in an effort to improve worker safety on offshore oil-drilling platforms, an oil company generated a list of dangerous work behaviors by analyzing previous accident reports, reviewing industry safety manuals, and interviewing and observing workers. Following detailed safety training, each work crew set goals to engage in safe behaviors 100 percent of the time on each shift. To help workers track their improvement, management posted a weekly safety record in the galley of each rig, where workers would see it when they gathered for meals and coffee breaks. Previously, employees were engaging in safe work behaviors just 76 percent of the time. After a year of goal setting (100 percent safe behavior on each shift) and weekly performance feedback at two oil rigs, however, workers behaved safely over 90 percent of the time. As a result, accident rates dropped from 21.1 percent to 6.1 percent at the first rig and from 14.2 percent to 12.1 percent at the second rig. By contrast, at a third oil rig, where training, goal setting, and feedback were not used, the total accident rate increased from 11.6 percent to 20.3 percent over the same time.89 So, to motivate employees with goal-setting theory, make sure they receive frequent performance-related feedback so that they can track their progress toward goal completion. • Assign specific, challenging goals.
Review 5: Goal-Setting Theory A goal is a target, objective, or result that someone tries to accomplish. Goalsetting theory says that people will be motivated to the extent to which they accept specific, challenging goals and receive feedback that indicates their progress toward goal achievement. The basic components of goal-setting theory are goal specificity, goal difficulty, goal acceptance, and performance feedback. Goal specificity is the extent to which goals are detailed, exact, and unambiguous. Goal difficulty is the extent to which a goal is hard or challenging to accomplish. Goal acceptance is the extent to which people consciously understand and agree to goals. Performance feedback is information about the quality or quantity of past performance and indicates whether progress is being made toward the accomplishment of a goal. Managers can use goal-setting theory to motivate workers by assigning specific, challenging goals, making sure workers truly accept organizational goals, and providing frequent, specific, performance-related feedback. 6
MOTIVATING WITH THE INTEGRATED MODEL
We began this chapter by defining motivation as the set of forces that initiates, directs, and makes people persist in their efforts to accomplish a goal. We also asked the basic question that managers ask when they try to figure out how to
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MOTIVATING WITH THE BASICS
MANAGERS SHOULD . . .
• • • •
Ask people what their needs are.
Satisfy lower-order needs first. Expect people’s needs to change. As needs change and lower-order needs are satisfied, satisfy higher-order needs by looking for ways to allow employees to experience intrinsic rewards.
EQUITY THEORY
• Look for and correct major inequities. • Reduce employees’ inputs. • Make sure decision-making processes are fair.
EXPECTANCY THEORY
• Systematically gather information to find out what employees want from their jobs. • Take specific steps to link rewards to individual performance in a way that is clear and understandable to employees. • Empower employees to make decisions if management really wants them to believe that their hard work and efforts will lead to good performance.
REINFORCEMENT THEORY
• • • •
GOAL-SETTING THEORY
• Assign specific, challenging goals. • Make sure workers truly accept organizational goals. • Provide frequent, specific, performance-related feedback.
Identify, measure, analyze, intervene, and evaluate critical performance-related behaviors. Don’t reinforce the wrong behaviors. Correctly administer punishment at the appropriate time. Choose the simplest and most effective schedules of reinforcement.
motivate their workers: “What leads to effort?” Though the answer to that question is likely to be somewhat different for each employee, Exhibit 13.17 helps you begin to answer it by consolidating the practical advice from the theories reviewed in this chapter in one convenient location. So, if you’re having difficulty figuring out why people aren’t motivated where you work, Exhibit 13.17 provides a useful, theory-based starting point.
Exhibit 13.17 Motivating with the Integrated Model
Key Terms continuous reinforcement schedule, 435
distributive justice, 428 equity theory, 424 expectancy, 430 expectancy theory, 429 extinction, 435 extrinsic reward, 420 fixed interval reinforcement schedule, 436 fixed ratio reinforcement schedule, 436
goal, 439 goal acceptance, 440 goal difficulty, 440
goal-setting theory, 440 goal specificity, 440 inputs, 424 instrumentality, 430 intermittent reinforcement schedule, 435
intrinsic reward, 421 motivation, 416 needs, 418 negative reinforcement, 434 outcome/input (O/I) ratio, 425 outcomes, 424 overreward, 425 performance feedback, 440 positive reinforcement, 434
procedural justice, 428 punishment, 435 referents, 424 reinforcement, 433 reinforcement contingencies, 433 reinforcement theory, 433 schedule of reinforcement, 433 underreward, 425 valence, 429 variable interval reinforcement schedule, 436 variable ratio reinforcement schedule, 436
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Concept Check 1. Identify the elements of motivation. What is the relationship between job performance, motivation, ability, and situational constraints? 2. How can managers use the basic principles of needs and rewards to motivate employees? 3. How do employees’ perceptions of fairness affect motivation? 4. Describe the components of equity theory. What role does justice play in equity theory? 5. What is the underlying tenet of expectancy theory?
6. Define valence, expectancy, and instrumentality, and describe their relationship. 7. How does reinforcement theory work? 8. Identify and describe the different schedules for delivering reinforcement. What should managers consider most when deciding which schedule to use? 9. What are the components of goal-setting theory? 10. How can managers use goal-theory to motivate employees?
Self-Assessment WHAT DO YOU NEED? What people want out of their jobs is as varied as the jobs themselves. And as you would expect, need theories show why not everyone wants to be CEO. Take the example of the woman who is extremely organized and efficient in her job as an assistant. She is so effective that she is offered a promotion to management, but she turns it down flatly, saying that she has no interest in
moving up the ladder, that she is happy doing what she does. What she needs from work clearly differs from the needs of the person who jumps at every opportunity to move up the corporate hierarchy. Which needs most motivate you? The Self-Assessment Appendix has a survey designed to give you insights into how strongly different needs motivate you. Go to page 621 and complete the questionnaire.
Management Decision MOTIVATING AN “A” WHO’S GETTING “Fs” You have definitely reached a low point. Frustrated by an employee who is uncooperative, unmotivated, and sloppy about his work, you have resorted to writing a “Dear Abby” style letter to a columnist in a popular business magazine. Letting out a heavy sigh, you scroll back to the top of your screen to review your work:
Dear Business Guru, A few months ago, I was promoted into my first management job at the greeting card company where I work. I inherited a whizbang team, full of talent and energy, with the exception of one person—Let’s call him David. Unlike the others on our team, he is uncooperative
and unmotivated, and his work is sloppy, even though I know he can do better! Several veteran employees have told me David used to be the crown jewel in the team, working hard, collaborating, and generating great ideas. But now he’s altogether different. I’m reluctant to fire him for two reasons: from a technical standpoint, he would be difficult to replace; and our division is under an indefinite hiring freeze. But his attitude and performance are having a negative impact on the rest of the team. What can I do to pull this guy out of a slump? Evidently, he was quite the employee — and I need him to be that star employee again.
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Pausing for a moment before hitting “send,” your eyes fall on an old management book in your overhead. Grabbing it, you say to yourself, “There’s got to be something in there to help me.” But as you flip through the pages, you can’t help thinking of all the time you’ve already spent on this guy. Maybe you should just fire him and be done.
Questions 1. Which motivational theory discussed in the chapter do you think would be most successful in helping David rekindle his spark? Why? 2. Which motivational theory will be most helpful in refocusing the efforts of your entire team? Explain. 3. Do you fire David or keep him on your team?
Management Team Decision MINING HUMAN CAPITAL Labor is probably the single largest expense of any business.90 According to some estimates, labor costs average about 60 percent of sales. In addition to salaries, labor costs include health insurance, paid time off, child-care benefits, tuition reimbursements, and any number of other programs designed to extrinsically motivate the work force. Many companies offer the same types of benefits across their organizations without knowing whether the benefits really motivate employees at all. In other words, companies often don’t know what return they are getting on their labor investment. The same is true where you work. As you head back to your desk from a meeting on cafeteria-style benefit plans, your boss intercepts you and says she wants to talk with you about cutting labor costs. As she plops into your side chair, she is already describing a new type of software that applies datamining technology to employee information to determine what is the best motivator. “We can get rid of onesize-fits-all benefit programs and tailor the benefits to each employee. This software lets you slice and dice employee data, like age, seniority, education, commute time, residential ZIP code, even the age and condition of the person’s office,” she says. “We could find out if we could pay someone, say, 20 percent less if we gave a three-month sabbatical every couple of years. Or we could predict the reaction of certain employees if we cut
our 401(k) match. Maybe that’s not as important to everyone as we think. We could find out who would quit if we did that and who could care less. Basically, we could find out what incentives would spike productivity the most with each employee, and that way we could cut costs without sabotaging morale. It would reduce the guesswork of rewarding our employees. Here is some literature on the various programs. I’d like your team to draft a recommendation to top management by next Monday. I’m really excited about this.” She leaves a small stack of brochures on your desk corner and leaves your office. All you can do is wonder, “What will the employees think of this idea?” Assemble a team of three to four students to review the issue of mining human resource data for information to help you customize incentives. Questions 1. Which motivational theory provides the biggest justification for employee data mining? Explain. 2. Does employee data mining violate any of the motivational theories? If so, which ones and how? 3. Will your team recommend mining employee data, or despite your boss’s enthusiasm, will you present reasons not to begin mining employee data? Explain your choice, using the motivational theories in the chapter as support for your recommendation.
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Develop Your Career Potential CUT YOUR COSTS, NOT YOUR MORALE Management textbooks abound with discussions of the importance of honest and open communication when disseminating negative information to employees.91 One study suggests that the best way to ruin morale and motivation is to spring bad news on employees without explaining the reasoning or rationale. Yet, despite the need to maintain a high level of motivation and morale during a receding economy, many companies cut perks without communicating the need to their employees. During the high-tech boom at the end of the twentieth century, many companies implemented programs to increase productivity, motivation, and job satisfaction. Some of the perks provided were minor, such as free soft drinks, catered lunches, snacks, and tickets to events such as a baseball games or the opera. Other free perks were more extravagant, such as concierge services to run errands for employees, service their vehicles, and pick up their laundry. Some firms even provided their employees with in-house massages and annual Caribbean cruises. Obviously, cutting these nonvalueadded expenses can save tremendous money for a struggling firm. In fact, many firms cut out both the extravagant perks and the basics as a way to conserve much-needed cash. Cutting perks, however, doesn’t have to be forever. Perks can be powerful motivational tools that companies can reintegrate into their performance reward systems. For this assignment, consider your own budget and expenses in terms of revenue and perks. Imagine that like so many companies, you experience a cash crunch. Your revenue (income) shrinks 25 percent, so you must trim some fat from your budget. Exercises 1. First, you will need to review your expenditures. What “perks” have you built into your budget as a
student? (Think pizza and beer.) Make a list of all your nonvalue-added expenses. This includes anything not directly related to your studies (like books, tuition, enrollment fees, pens, paper, etc.) or your fixed expenses (like rent, car payments, insurance, etc.). 2. If you experienced a 25 percent reduction in your income—as numerous firms did after the tech bubble burst—which perks would you eliminate? In addition, are there items that you previously considered necessities that you could cut out? An example would be selling your car (thereby eliminating car payments and related insurance) and taking public transportation or catching a ride with a friend. What about getting a roommate, moving into the dorms, or living with your parents? 3. Often employees develop a sense of entitlement about perks, and when the perks are trimmed, great dissatisfaction can result. Companies even lose employees when perks are cut. In this exercise, let’s consider that cutting out your nonvalue-added (i.e., fun) expenditures may put a crimp in your social life. In fact, you may have trouble staying in the loop. What can you do to “retain” your social friends as you cut down on your personal perks? Do you think that “retention” will even be an issue for you? Why or why not? 4. Once you have taken the axe to your perks, how can you reincorporate them into your budget, this time as motivational tools? Which perks would motivate you to have perfect attendance in class? To make an “A”? Straight “A’s”? Be creative. The purpose is to see if you can modify your own behavior by using your perks.
Take Two
Biz Flix For Love of the Game
Billy Chapel (Kevin Costner), a 20-year veteran pitcher with the Detroit Tigers, learns just before the season’s last game that the team’s new owners want to trade him. He also learns that his partner, Jane Aubrey (Kelly Preston), intends to leave him. Faced with these daunting blows, Chapel, who decides to retire, wants to pitch a perfect final game. Director Sam Raimi’s love of baseball shines through in some striking visual effects. This scene is a slightly edited version of the “Just Throw” sequence, which begins the film’s exciting closing scenes in which Chapel pitches his last game. In this scene, the Tigers’ catcher Gus Sinski (John C. Reilly) comes out to the pitching mound to talk to Billy. What to Watch for and Ask Yourself
1. How would you describe Billy Chapel’s esteem needs at this point in the game? 2. Do you expect Gus Sinski’s talk to have any effect on Chapel? If it will, what will be the effect? Why? 3. What rewards potentially exist for Billy Chapel? Remember, this is the last baseball game of his career.
Management Workplace Modern Postcard
Modern Postcard prides itself on being able to turn around a customer’s order in two days. That means, designing the postcard, printing it, and mailing it out to the addresses on the customer’s mailing list. For a company that produces 100 million postcards a year for some 150,000 customers, that’s quite a feat, even for a company with a digital work flow. How can a company motivate 250 employees to act so quickly to serve customers? Founder Steve Hoffman and his management team use several techniques to encourage employees to always do their best work. What to Watch for and Ask Yourself
1. Which motivational theory best describes the practices at Modern Postcard? 2. How is Steve Hoffman using goal-setting theory? Are there elements of the theory for which Hoffman does not have a related business practice? If so, how could Modern Postcard fill these gaps? 3. What role do the Image Awards play in motivating the employees at Modern Postcard?
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O U T L I N E
Chapter14 What Would You Do? What Is Leadership? 1. Leadership 1.1 Leaders versus Managers 1.2 Substitutes for Leadership: Do Leaders Always Matter?
2. Who Leaders Are and What Leaders Do 2.1 Leadership Traits 2.2 Leadership Behaviors
Situational Approaches to Leadership 3. Putting Leaders in the Right Situation: Fiedler’s Contingency Theory 3.1 Leadership Style: Least Preferred Coworker 3.2 Situational Favorableness 3.3 Matching Leadership Styles to Situations
4. Adapting Leader Behavior: Path-Goal Theory 4.1 Leadership Styles 4.2 Subordinate and Environmental Contingencies 4.3 Outcomes
5. Adapting Leader Behavior: Hersey and Blanchard’s Situational Leadership Theory 5.1 Worker Readiness 5.2 Leadership Styles
6. Adapting Leader Behavior: Normative Decision Theory 6.1 Decision Styles 6.2 Decision Quality and Acceptance
Strategic Leadership 7. Visionary Leadership 7.1 Charismatic Leadership 7.2 Transformational Leadership
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW
Xtra! Seven exhibit worksheets, author FAQs, quiz, Management News, and the video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter Study Guide Pre-test, study questions, and a management scenario
43rd Floor, Tyco Headquarters, New York City.1 Your previous boss, the CEO of Motorola, was stunned when you took this job. Your wife said you were crazy. Maybe they were right, as things have been wild right from the start. On your first day as the new CEO of Tyco, you received a surprise visit from seven shareholders who owned 15 percent of the company’s stock. They demanded that you replace most of the members of the board of directors, whom they ultimately held responsible for the company’s astonishing problems—problems that are now yours to fix. These problems include $28 billion in debt, $11.3 billion of which is due next year, with $2.5 billion due in just four months. Over the last eight years, the previous CEO, Dennis Kozlowski, spent $63 billion acquiring 1,000 companies and turning Tyco into a massive conglomerate that makes thousand of products in five general areas: health care, electronics, fire and security systems, plastics, and engineered products. Unfortunately, he overpaid by 52 percent on average. So, with huge debt payments looming and little cash flow, rumors are circulating on Wall Street that Tyco will file for bankruptcy. Another problem is the expensive office suite, with one of the best views in New York City overlooking Central Park. Many Fortune 500 companies have offices in Manhattan, but this one is special. Kozlowski spent lavishly to adorn the office with thick Persian carpets and expensive marble floors, an executive kitchen where the corporate chef could prepare gourmet meals, a massive boardroom with a mural reminiscent of a medieval castle covering one of the walls, and an expansive office for the CEO with its own separate kitchen “the size of a New York onebedroom apartment.” Your first reaction was that Donald Trump would be jealous. Your second reaction was, “This is embarrassing.” And then there are the problems of greed and fraud. According to the criminal charges brought against him, Kozlowski treated Tyco as “his personal piggy bank,” using over $400 million for personal expenditures, including $6,000 for a gold-laced shower curtain, $15,000 for an umbrella stand, $12 million for art for his homes, $29 million for an estate in Florida, and $16.8 million for a Fifth Avenue apartment in New York City, not including $3 million in improvements and
What Would You Do?
$11 million in furnishings. Steven Cutler, chief of enforcement for the Securities and Exchange Commission, said that the total amount was “staggering.” Kozlowski was able to hide his spending for seven years by using two corporate accounts: one was supposed to pay the relocation and moving expenses for Tyco managers, and the other was supposed to be used for loans for top employees. But, where do you start? You wouldn’t have taken the job if you didn’t believe that Tyco’s underlying businesses were essentially sound. Having studied the company’s finances, you knew the reports of impending bankruptcy are exaggerated. But how can you get people inside and outside the company to see what you see—that with sound management, Tyco can not only turn around, but can be an exceptional company? What do you need to do as a leader to fix that problem? Next, things clearly went wrong when Kozlowski was in charge. Accountability, checks and balances, legal requirements, and basic issues of right and wrong were ignored. Personal avarice replaced corporate responsibility. But, how many managers besides Kozlowski STUDY TIP were involved in the fraud and deception? In other words, how Your professor and TA are the far does the “rot” go? Will you most valuable resources in have to “amputate,” or will it your course. If you have be enough to trim away the questions on the fundamental “infected” parts of the organiconcepts of leadership, go to zation? What does an ethical leader do in this situation? office hours. Report back to Finally, after the initial cleanup, your study partner or group. what do you need to do to make sure that such illegal behavior and ethical lapses never occur again to this extent at Tyco? If you were in charge at Tyco, what would you do?
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Do I have what it takes to lead? What are the most important things leaders do? How can I transform a poorly performing department, division, or company? Do I need to adjust my leadership depending on the situation and the employee? Why doesn’t my leadership inspire people? If you’ve ever been “in charge,” or even just thought about it, chances are you’ve considered similar questions. Well, you’re not alone—millions of leaders in organizations across the world struggle with these fundamental leadership issues on a daily basis. We begin this chapter by discussing what leadership is, who leaders are, meaning their traits and characteristics, and what leaders do that makes them different from people who aren’t leaders. Next we examine four major contingency theories of leadership that specify which leaders are best suited for which situations or how leaders should change their behavior to lead different people in different circumstances. The chapter ends with a review of strategic leadership issues, such as charismatic and transformational leadership, which are concerned with working with others to meet long-term goals and with creating a viable future for an organization.
What Is Leadership?
leadership The process of influencing others to achieve group or organizational goals.
Southwest Airlines flies two to three times as many passengers per employee as other airlines at a cost 25 to 40 percent below its competitors’.2 One of the keys to Southwest’s performance is that it empties its planes; refills them with passengers, crews, fuel, and food (peanuts and soft drinks); and has them back on the runway in 20 minutes, compared to an hour for most airlines. This allows Southwest to keep each of its planes filled with paying passengers about three more hours a day. Why is Southwest able to achieve such incredible results? Herb Kelleher, Southwest’s chairman and cofounder, answers the question this way: “We pay just as good wages and benefits as other airlines, but our costs are lower because our productivity is higher, which is achieved through the dedicated energy of our people. It’s sheer willpower—no mechanical tricks. We’ve got exactly the same equipment. The difference is, when a plane pulls into a gate, our people run to meet it. Ponce de Leon was looking for the Fountain of Youth in the wrong place—he should have come to Southwest Airlines.” As Kelleher and the rest of the managers at Southwest Airlines have discovered, leadership is the process of influencing others to achieve group or organizational goals. For Southwest Airlines, that means influencing employees to keep costs low by getting planes back on the runway in 20 minutes. 1 2
1
After reading the next two sections, you should be able to explain what leadership is. describe who leaders are and what effective leaders do.
LEADERSHIP
In Chapter 1, we defined management as getting work done through others. In other words, managers don’t do the work themselves. Managers help others do their jobs better. By contrast, leadership is the process of influencing others to achieve group or organizational goals. What then are the key differences between leaders and managers? Another question that goes to the nature of leadership is whether it’s required in every situatuin. Does leadership always matter? Or are there situations when leadership isn’t needed or may even make things worse?
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Let’s learn more about leadership by exploring 1.1 the differences between leaders and managers and 1.2 substitutes for leadership.
1.1 Leaders versus Managers
AP PHOTO/HARRY CABLUCK
According to Professor Warren Bennis, the primary difference between leaders and managers, as shown in Exhibit 14.1, is that leaders are concerned with doing the right thing, while managers are concerned with doing things right.3 In other words, leaders begin with the question, “What should we be doing?” while managers start with “How can we do what we’re already doing better?” Leaders focus on vision, mission, goals, and objectives, while managers focus on productivity and efficiency. Managers see themselves as preservers of the status quo, while leaders see themselves as promoters of change and challengers of the status quo in that they encourage creativity and risk taking. One of the reasons for Dell, Inc.’s long-term success and profitability is that founder and chairman Michael Dell never accepts the status quo. He fervently believes that everything the company does can be changed and improved. Says Dell, “Celebrate for a nanosecond. Then move on.”4 Another difference is that managers have a relatively short-term perspective, while leaders take a long-term view. When Dell opened its first factory in Asia, Michael Dell congratulated the plant manager by sending him one of his old running shoes to stress that opening that plant was just the first step in the company’s strategy of opening manufacturing plants in that part of the world.5 Managers are also more concerned with means, how to get things done, while leaders are more concerned with ends, what gets done. Managers are concerned with control and limiting the choices of others, while leaders are more concerned with expanding people’s choices and options.6 Finally, managers solve problems so that others can do their work, while leaders inspire and motivate others to find their own solutions. Though leaders are different from managers, in practice, organizations need them both. Managers are critical to getting out the day-to-day work, and leaders are critical to inspiring employees and setting the organization’s long-term direction. That’s why Dell, Inc. follows a “two-in-a-box” philosophy in which founder and chairman Michael Dell and CEO/president Kevin Rollins never make a major decision without checking with each other. Michael Dell leads Managers the company while Rollins, the “day-to-day general,” manages it. Their offices are right next to each other, separated only by a glass wall. Says Dell, “This company is much stronger when the • Do things right two of us are doing it together.” • Status quo The key issue for any organization is the • Short term extent to which it is properly led and properly • Means managed. As Warren Bennis said in summing • Builders up the difference between leaders and man• Problem solving agers, “American organizations (and probably those in much of the rest of the industrialized world) are under led and over managed. They do not pay enough attention to doing the right thing, while they pay too much attention to doing things right.”7
Every year, Michael Dell spends time working the phones at Dell, Inc.’s U.S. consumer department. He makes a point not to mention his last name.
Exhibit 14.1 Managers versus Leaders
Leaders
• • • • • •
Do the right things Change Long term Ends Architects Inspiring & motivating
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HE R IGHT T T G HI IN NG O D
1.2 Substitutes for Leadership: Do Leaders Always Matter? THE THREE M’S: MISSION, MENTOR, AND MIRROR Doctors take the Hippocratic oath. Lawyers swear to protect and enforce the law. Leaders . . . well, there’s no equivalent for business leaders. That’s why Harvard professor Howard Gardner says that business leaders can develop personal ethics by focusing on their mission, a mentor, and the mirror. • First, leaders need to develop a personal mission statement by asking themselves these questions: Why are you doing what you’re doing? What do you want from work? What are your personal goals? Let your personal mission statement, and not the company’s, guide your ethical behavior. • Second, take care in choosing a mentor. An interesting study compared 20 business leaders selected at random with 20 “good” business leaders nominated by businesspeople, business school professors, and deans. The randomly selected business leaders focused on short-term goals exclusively, worrying only about next quarter’s results. By contrast, 18 of the 20 “good” executives focused on the long term, on doing what was right for the company in the long run. So, when choosing a mentor, choose a “good” one. • Third, periodically stand in front of the mirror to assess your ethical performance as a business leader. Are you proud or ashamed of what you accomplished and how you accomplished it? Are you proud or ashamed of your company? What needs to change to make you proud?
One of the basic assumptions about leadership is that leaders always matter. According to this thinking, without sound leadership, organizations are sure to fail. In fact, when companies struggle, their leaders are almost always blamed for their poor performance. When Hewlett-Packard struggled, it fired CEO Carly Fiorina. The Wall Street Journal wrote: Ms. Fiorina’s ouster reflects increasingly clear strategic problems at H-P. The company faces fierce competition from Dell Inc. in personal computers and International Business Machines Corp. in computer services and corporate computing. . . . Ms. Fiorina’s leadership was also marked by a drop in morale at a company with a legendary history of a collegial culture. She had a compelling public persona that gained her many fans in the business world. Yet inside H-P, she was a highly polarizing figure who stirred deep animosity from many veteran employees. Her abrupt—some said autocratic—management style won few fans. In recent months, several high-level executives had quit for positions elsewhere, something that increasingly concerned the board, according to people familiar with the matter. . . . Some H-P employees reacted to the news of Ms. Fiorina’s ouster by holding champagne toasts, according to several employees, who described the scenes as “jubilant.”8
In some situations and circumstances, however, leadership isn’t necessary, is unlikely to make much of a difference, or isn’t to blame for poor performance. These are known as leadership substitutes and leadership neutralizers.9 Exhibit 14.2 lists a number of subordinate, task, or organizational characteristics that can act as leadership substitutes or neutralizers (some can act as both) for either people-related or task-related leader behaviors. Leaders’ people-related behaviors, such as being approachable, supportive, or showing concern for employees, affect how satisfied people are with their jobs. Leaders’ task-related behaviors, such as setting goals, giving directions, and providing resources, affect the extent to which people are able to perform their jobs well. Leadership substitutes are subordinate, task, or organizational characteristics that make leaders redundant or unnecessary. For instance, when subordinates have ability, experience, training, So, do the right thing. Develop a personal and knowledge about their jobs (see subordinate characterismission statement. Choose the right tics in Exhibit 14.2), task-related leader behavior that specifies mentor. And look hard at yourself in the goals, task assignments, and how to do the job is unlikely to 10 mirror. improve a subordinate’s work performance. Think about it. Workers already have the capability to do their jobs. And the job itself provides enough information to let them know how well leadership substitutes they’re doing or what they might do to correct performance problems. In situaSubordinate, task, or organizational tions like this, where leadership substitutes are strong, leaders don’t need to tell characteristics that make leaders redundant or unnecessary. workers what to do or how to do their jobs. Leadership neutralizers are subordinate, task, or organizational characteristics leadership neutralizers that can interfere with a leader’s actions or make it impossible for a leader to Subordinate, task, or organizational influence followers’ performance. Unlike substitutes, which simply take characteristics that can interfere with a the place of leaders, leadership neutralizers create an “influence vacuum.” In leader’s actions or make it impossible other words, ironically leadership neutralizers create a need for leadership by for a leader to influence followers’ performance. preventing leadership from working. For example, when subordinates are indifferent toward organizational rewards (see subordinate characteristics in
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CHARACTERISTICS
453
PEOPLE-RELATED LEADERSHIP BEHAVIORS
TASK-RELATED LEADERSHIP BEHAVIORS
SUBORDINATE •
Ability, experience, training, knowledge
Neutralize
Substitute, Neutralize
•
Need for independence
Neutralize
Neutralize
•
Professional orientation
Substitute, Neutralize
Substitute, Neutralize
•
Indifference toward organizational rewards
Neutralize
Neutralize
TASK •
Unambiguous and routine tasks
No effect
Substitute, Neutralize
•
Performance feedback provided by the work itself
No effect
Substitute, Neutralize
•
Intrinsically satisfying work
Substitute, Neutralize
Neutralize
ORGANIZATIONAL •
Formalization, meaning specific plans, goals, and areas of responsibility
No effect
Neutralize
•
Inflexibility, meaning rigid, unbending rules and procedures
No effect
Neutralize
•
Highly specified staff functions
No effect
Neutralize
•
Cohesive work groups
Substitute, Neutralize
Substitute, Neutralize
•
Organizational rewards beyond a leader’s control
Neutralize
Neutralize
•
Spatial distance between supervisors and subordinates
Neutralize
Neutralize
Source: S. Kerr & J. M. Jermier, “Substitutes for Leadership: Their Meaning and Measurement,” Organizational Behavior and Human Performance 22 (1978): 375–403.
Exhibit 14.2
Exhibit 14.2), there may be nothing that a leader can do to reward them for good performance. Likewise, inflexible rules and procedures (see organizational characteristics in Exhibit 14.2), such as union contracts that specify that all employees be paid the same, organizational policies that reward employees by seniority, and salary and raise processes that don’t give leaders enough money to substantially reward good performers, effectively neutralize the ability of leaders to reward workers. Spatial distance (see organizational characteristics in Exhibit 14.2) can also neutralize leadership. Spatial distance arises when supervisors and subordinates don’t work in the same place, as occurs with telecommuters or people working thousands of miles away in overseas offices. Spatial distance typically results in infrequent feedback, little or no face-to-face contact, and being “out of sight and out of mind,” all of which make it very difficult for leaders to lead. Because of those problems, John Yeros, founder and CEO of Hyperspace Communications, a software company, lets only one of his employees, a programmer, work from home. Yeros says that when everyone is at the office, it’s easier to “keep on the same page.” Plus, it’s easier for him as a leader. “I like to see them, feel them, touch them, and have them around,” he says.11 In fact, some companies find telecommuting to be so disruptive to leadership processes that they require their telecommuters to come into the office at least once or twice a week. So do leaders always matter? Leadership substitutes and neutralizers indicate that sometimes they don’t. This doesn’t mean that leaders never matter, though.
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Quite the opposite. Leaders do matter, but they’re not superhuman. They can’t do it all by themselves. And they can’t fix every situation. In short, leadership is very important. But poor leadership isn’t the cause of every organizational crisis, and changing leaders isn’t the solution to every company problem.
Review 1: Leadership Leadership is the process of influencing others to achieve group or organizational goals. Leaders are different from managers. The primary difference is that leaders are concerned with doing the right thing, while managers are concerned with doing things right. Furthermore, managers have a short-term focus and are concerned with the status quo, with means rather than ends, and with solving others’ problems. By contrast, leaders have a long-term focus and are concerned with change, with ends rather than means, and with inspiring and motivating others to solve their own problems. Organizations need both managers and leaders. But, in general, companies are overmanaged and underled. While leadership is important, leadership substitutes and neutralizers create situations in which leadership isn’t necessary or is unlikely to make much of a difference. Leadership substitutes are subordinate, task, or organizational characteristics that make leaders redundant or unnecessary. By contrast, leadership neutralizers are subordinate, task, or organizational characteristics that interfere with a leader’s actions or make it impossible for a leader to influence followers’ performance. 2
WHO LEADERS ARE AND WHAT LEADERS DO
Every year, Fortune magazine conducts a survey to determine corporate America’s “most admired” companies.12 And, every few years, as part of that study, it takes a look at the leaders of those companies. Interestingly, the last time it did this, it found that the CEOs of its 10 most admired companies were surprisingly different. In fact, said Fortune, “Every conceivable leadership style is represented by these CEOs.”13 General Electric’s then CEO was described as “combative,” as someone who “tilts his head, and thrusts out his chin as if to say, ‘Go ahead, take your best shot’—and is never happier than when you do.” Southwest Airlines’ then CEO was described as “a prankster and a kisser so unabashedly affectionate that his company’s ticker symbol is LUV, so hands-on he has loaded baggage and served peanuts to passengers.” In fact, Southwest’s CEO admitted that he was terrible at understanding the financial side of business, something that no regular CEO would ever admit. Finally, Coca-Cola’s then CEO was the mirror image of Southwest’s CEO. Fortune described him as “undemonstrative and a ‘financial wizard.’” So, if the CEOs of Fortune’s “most admired” corporations are all different, just what makes a good leader? Let’s learn more about who leaders are by investigating 2.1 leadership traits and 2.2 leadership behaviors.
2.1 Leadership Traits trait theory A leadership theory that holds that effective leaders possess a similar set of traits or characteristics.
traits Relatively stable characteristics, such as abilities, psychological motives, or consistent patterns of behavior.
Trait theory is one way to describe who leaders are. Trait theory says that effective leaders possess a similar set of traits or characteristics. Traits are relatively stable characteristics, such as abilities, psychological motives, or consistent patterns of behavior. For example, according to trait theory, leaders are commonly thought to be taller and more confident and to have greater physical stamina (i.e., higher energy levels) than nonleaders. Trait theory is also known as the “great person” theory because early versions of the theory stated that leaders are born, not made. In other words, you either have the “right stuff” to be a leader, or you don’t. And if you don’t, there is no way to get “it.” For some time, it was thought that trait theory was wrong and that there are no consistent trait differences between leaders and nonleaders, or between
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effective and ineffective leaders. However, more recent evidence shows that “successful leaders are not like other people,” that successful leaders are indeed different from the rest of us.14 More specifically, as shown in Exhibit 14.3, leaders are different from nonleaders in the following traits: drive, the desire to lead, honesty/integrity, self-confidence, emotional stability, cognitive ability, and knowledge of the business.15 Drive refers to high levels of effort and is characterized by achievement, motivation, initiative, energy, and tenacity. In terms of achievement and ambition, leaders always try to make improvements or achieve success in what they’re doing. Because of their initiative, they have strong desires to promote change or solve problems. Leaders typically have more energy, and they have to, given the long hours they put in and followers’ expectations that they be positive and “up.” Thus, leaders must have physical, mental, and emotional vitality. Leaders are also more tenacious than nonleaders and are better at overcoming obstacles and problems that would deter most of us. Successful leaders also have a stronger desire to lead. They want to be in charge and think about ways to influence or convince others about what should or shouldn’t be done. Honesty/integrity is also important to leaders. Honesty, being truthful with others, is a cornerstone of leadership. Without honesty, leaders won’t be trusted. When leaders have it, subordinates are willing to overlook other flaws. For example, one follower said this about the leadership qualities of his manager: “I don’t like a lot of the things he does, but he’s basically honest. He’s a genuine article, and you’ll forgive a lot of things because of that. That goes a long way in how much I trust him.”16 Integrity is the extent to which leaders do what they said they would do. Leaders may be honest and have good intentions, but if they don’t consistently deliver on what they promise, they won’t be trusted. Self-confidence, believing in one’s abilities, also distinguishes leaders from nonleaders. Self-confident leaders are more decisive and assertive and are more likely to gain others’ confidence. Moreover, self-confident leaders will admit mistakes because they view them as learning opportunities rather than a refutation of their leadership capabilities. This also means that leaders have emotional stability. Even when things go wrong, they remain even-tempered and consistent in their outlook and in the way they treat others. Leaders who can’t control their emotions, who anger quickly or attack and blame others for mistakes, are unlikely to be trusted. Leaders are also smart. Leaders typically have strong cognitive abilities. This doesn’t mean that leaders are geniuses, far from it. But it does mean that leaders have the capacity to analyze large amounts of seemingly unrelated, complex Exhibit 14.3 Leadership Traits information and see patterns, opportunities, or threats where others might not see them. Finally, leaders also “know their stuff,” which means they have superior technical knowledge about the businesses they run. Leaders who have a good knowledge of Honesty the business understand the key technological decisions and and Desire integrity to lead concerns facing their companies. More often than not, studies indicate that effective leaders have long, extensive experience in their Selfindustries. confidence Drive How does Anne Mulcahy, the CEO who turned around Xerox, Leadership Traits measure up on these traits? In general, quite well. Fortune magazine said this about her: “She is straightforward, hard-working, disciKnowledge Emotional plined. She is fiercely loyal to Xerox—the company, the brand, the of the stability business people. She has the integrity of the Catholic schoolgirl she was for Cognitive 16 years. Her coworkers describe her as both compassionate and ability tough. She is not afraid of bad news. . . . Her willingness to work shoulder to shoulder with subordinates gives her unusual credibility and the ability to galvanize her team.”17
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W O R K S
Leadership Traits Do Make a Difference For decades, researchers assumed that leadership traits, such as drive, emotional stability, cognitive ability, and charisma were not related to effective leadership. More recent evidence, however, shows that there are reliable trait differences between leaders and nonleaders. In fact, 54 studies based on more than 6,000 people clearly indicate that in terms of leadership traits, “successful leaders are not like other people.” TRAITS AND PERCEPTIONS OF LEADERSHIP EFFECTIVENESS
Several leadership models argue that successful leaders will be viewed by their followers as good leaders. (This is completely different from determining whether leaders actually improve organizational performance.) Consequently, one test of trait theory is whether leaders with particular traits are viewed as more or less effective leaders by their followers. Intelligence. On average, there is a 75 percent chance that intelligent leaders will be seen as better leaders than less intelligent leaders. Probability of Success 10%
20%
30%
40%
50%
60%
probability of success
70%
80%
90%
100%
75%
Dominance. On average, there is only a 57 percent chance that leaders with highly dominant personalities will be seen as better leaders than those with less dominant personalities. Probability of Success 10%
20%
30%
40%
probability of success
50%
60%
70%
80%
90%
100%
57%
Extroversion. On average, there is a 63 percent chance that extroverts will be seen as better leaders than introverts. Probability of Success 10%
20%
30%
40%
probability of success
50%
60% 63%
70%
80%
90%
100%
CHARISMA AND LEADERSHIP EFFECTIVENESS
As discussed at the end of the chapter, charismatic leadership is the set of behavioral tendencies and personal characteristics of leaders that creates an exceptionally strong relationship between leaders and their followers. More specifically, charismatic leaders articulate a clear vision for the future that is based on strongly held values or morals; model those values by acting in a way consistent with the company’s vision; communicate high performance expectations to followers; and display confidence in followers’ abilities to achieve the vision. Charisma and Performance. On average, there is a 72 percent chance that charismatic leaders will have better-performing followers and organizations than less charismatic leaders. Probability of Success 10%
20%
30%
40%
50%
probability of success
60%
70%
80%
90%
100%
72%
Charisma and Perceived Leader Effectiveness. On average, there is an 89 percent chance that charismatic leaders will be perceived as more effective leaders than less charismatic leaders. Probability of Success 10%
20%
30%
40%
50%
60%
70%
probability of success
80%
90%
100%
89%
Charisma and Leader Satisfaction. On average, there is a 90 percent chance that the followers of charismatic leaders will be more satisfied with their leaders than the followers of less charismatic leaders.18 Probability of Success 10%
20%
30%
40%
50%
60%
70%
probability of success
80%
90%
90%
100%
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Initially, however, Mulcahy had a clear weakness: because her experience was limited to sales, she lacked knowledge of the entire business. And since Xerox was $14.1 billion in debt and had only $154 million in cash on hand, she had to learn fast. So she asked Joe Mancini, Jr., the director of corporate financial analysis, to give her a course in “Balance Sheet 101.” Mulcahy said, “It was an unusual situation for him—tutoring the CEO. But there wasn’t a lot of time for false pride.”19 Every night she took home binders full of information to study, and eventually she transformed her knowledge of the financial side of the business from a weakness into a strength.
2.2 Leadership Behaviors Thus far, you’ve read about who leaders are. Traits alone are not enough to make a successful leader, however, though they are a precondition for success. After all, it’s hard to imagine a truly successful leader who lacks all of these qualities. Leaders who have these traits (or many of them) must then take actions that encourage people to achieve group or organizational goals.20 Accordingly, we now examine what leaders do, meaning the behaviors they perform or the actions they take to influence others to achieve group or organizational goals. Researchers at the University of Michigan, Ohio State University, and the University of Texas examined the specific behaviors that leaders use to improve subordinate satisfaction and performance. Hundreds of studies were conducted and hundreds of leader behaviors were examined. At all three universities, two basic leader behaviors emerged as central to successful leadership: initiating structure (called job-centered leadership at the University of Michigan and concern for production at the University of Texas) and considerate leader behavior (called employee-centered leadership at the University of Michigan and concern for people at the University of Texas).21 In fact, these two leader behaviors form the basis for many of the leadership theories discussed in this chapter. Initiating structure is the degree to which a leader structures the roles of followers by setting goals, giving directions, setting deadlines, and assigning tasks. A leader’s ability to initiate structure primarily affects subordinates’ job performance. In helping to turn around Xerox, Ursula Burns, head of manufacturing, focused on nuts-and-bolts initiating structure issues. She granted freedom and authority to those meeting goals and paid personal visits on those who didn’t. CEO Anne Mulcahy described Burns’s approach this way: “She’d say, ‘Jim, you blew it; tell us what happened.’”22 The message was clear: Meet your goals, and you control your destiny. Meet them late or fail to meet them, and you’ll have to defend your actions. With Xerox near bankruptcy, Burns didn’t have time for anything else. After all, Mulcahy had given Burns a tough goal of her own to meet—increase manufacturing productivity while cutting $1 billion in costs. Consideration is the extent to which a leader is friendly, approachable, and supportive and shows concern for employees. Consideration primarily affects subordinates’ job satisfaction. Specific leader consideration behaviors include listening to employees’ problems and concerns, consulting with employees before making decisions, and treating employees as equals. Twenty-five years ago Wal-Mart’s CEO, Lee Scott, received a lesson in the importance of consideration from founder Sam Walton. Scott, who was then in charge of a transportation unit, was known for his tough management style and for sending “blistering memos.” When “Mr. Sam” called him into his office, Scott found nine of his truck drivers there waiting for him. The drivers, who were taking advantage of Wal-Mart’s “open door” policy, had complained to Walton about the way Scott treated them and asked that he be fired. According to Scott, “They just wanted to do their work and be appreciated for it. So Mr. Walton
initiating structure The degree to which a leader structures the roles of followers by setting goals, giving directions, setting deadlines, and assigning tasks.
consideration The extent to which a leader is friendly, approachable, and supportive and shows concern for employees.
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Exhibit 14.4 Blake/Mouton Leadership Grid
High 9
8
asked me, with them there, if I could do it differently.”23 After agreeing that he could, Scott said that Walton “had me stand at the door as they were leaving and thank each one for having the courage to use the open door, which is one of the very basic principles of Wal-Mart.”24 That office is now Scott’s, and Wal-Mart has the same open door through which any Wal-Mart employee can walk to talk with the CEO. Although researchers at all three universities generally agreed that initiating structure and consideration were basic leader behaviors, they differed on the interaction and effectiveness of these behaviors. The University of Michigan studies indicated that initiating structure and consideration were mutually exclusive behaviors on opposite ends of the same continuum. In other words, leaders who wanted to be more considerate would have to do less initiating of structure (and vice versa). The University of Michigan studies also indicated that only considerate leader behaviors (i.e., employee-centered) were associated with successful leadership. By contrast, researchers at Ohio State University and the University of Texas found that initiating structure and consideration were independent behaviors, meaning that leaders can be considerate and initiate structure at the same time. Additional evidence confirms this finding.25 The same researchers also concluded that the most effective leaders were strong on both initiating structure and considerate leader behaviors. This “high-high” approach can be seen in the upper right corner of the Blake/Mouton leadership grid, shown in Exhibit 14.4. Blake and Mouton used two leadership behaviors, concern for people (i.e., consideration) and concern for production (i.e., initiating structure), to categorize five different leadership styles. Both behaviors are rated on a 9-point scale with 1 representing “low” and 9 representing “high.” Blake and Mouton suggest that a “high-high” or 9,9
1, 9 Country Club Management Thoughtful attention to needs of people for satisfying relationships leads to a comfortable, friendly organization atmosphere and work tempo.
9, 9 Team Management Work accomplished is from committed people: interdependence through a “common stake” in organization purpose leads to relationships of trust and respect.
Concern for people
7
6 5, 5 Middle-of-the-Road Management Adequate organization performance is possible through balancing the necessity to get out work with maintaining morale of people at a satisfactory level.
5
4
3
2
1, 1 Impoverished Management Exertion of minimum effort to get required work done is appropriate to sustain organization membership.
9, 1 Authority-Compliance Efficiency in operations results from arranging conditions of work in such a way that human elements interfere to a minimum degree.
Low 1
1
2
3
4
Low
5
6
Concern for production Grid®,”
7
8
9 High
Source: R. R. Blake & A. A. McCanse, “The Leadership Leadership Dilemmas—Grid Solutions (Houston: Gulf Publishing Company), 21. Copyright © 1991, by Scientific Methods, Inc. Reproduced by permission of the owners.
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leadership style is the best. They call this style team management because leaders who use it display a high concern for people (9) and a high concern for production (9). By contrast, leaders use a 9,1 authority-compliance leadership style when they have a high concern for production and a low concern for people. A 1,9 country club style occurs when leaders care about having a friendly enjoyable work environment but don’t really pay much attention to production or performance. The worst leadership style, according to the grid, is the 1,1 impoverished leader, who shows little concern for people or production and does the bare minimum needed to keep his or her job. Finally, the 5,5 middle-of-the-road style occurs when leaders show a moderate amount of concern for both people and production. Is the team management style, with a high concern for production and a high concern for people, the “best” leadership style? Logically, it would seem so. Why wouldn’t you want to show high concern for both people and production? Nonetheless, nearly 50 years of research indicate that there isn’t one “best” leadership style. The “best” leadership style depends on the situation. In other words, no one leadership behavior by itself and no one combination of leadership behaviors works well across all situations and employees.
Review 2: Who Leaders Are and What Leaders Do Trait theory says that effective leaders possess traits or characteristics that differentiate them from nonleaders. Those traits are drive, the desire to lead, honesty/integrity, self-confidence, emotional stability, cognitive ability, and knowledge of the business. Traits alone aren’t enough for successful leadership, however, leaders who have these traits (or many of them) must also behave in ways that encourage people to achieve group or organizational goals. Two key leader behaviors are initiating structure, which improves subordinate performance, and consideration, which improves subordinate satisfaction. There is no “best” combination of these behaviors. The “best” leadership style depends on the situation.
Situational Approaches to Leadership Imagine that you’re the director of emergency medicine at a major hospital and you’ve just learned that one of your doctors broke hospital policy by ordering a series of expensive tests for an emergency room patient without first getting approval from the hospital’s cardiologist. The tests were for an extremely rare heart condition that could prove fatal if not detected. When you learn that the doctor involved is a new intern with just two months of experience, you become incensed at the flagrant violation of the rules and insist that the doctor didn’t know what he was doing! But what if the physician who ordered the tests was your most experienced emergency room physician? Instead of being angry and doubting the diagnosis, you probably would think, “Great catch! I wonder what tipped her off?” In other words, you would react differently depending on the situation and the person involved. After leader traits and behaviors, the situational approach to leadership is the third major method used in the study of leadership. There are four major situational approaches to leadership—Fiedler’s contingency theory, path-goal theory, Hersey and Blanchard’s Situational Leadership theory, and Vroom and Yetton’s normative decision model. All assume that the effectiveness of any leadership style, the way a leader generally behaves toward followers, depends on the situation.26 Accordingly, there is no one “best” leadership style. Nonetheless, these theories differ in one significant way. Fiedler’s contingency theory assumes that leadership styles are consistent and difficult to change. Therefore, leaders must be placed in or “matched” to a situation that fits their leadership style. In contrast, the other three situational theories all assume that
leadership style The way a leader generally behaves toward followers.
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leaders are capable of adapting and adjusting their leadership styles to fit the demands of different situations. 3 4 5 6
3 contingency theory A leadership theory that states that in order to maximize work group performance, leaders must be matched to the situation that best fits their leadership style.
After reading the next four sections, you should be able to explain Fiedler’s contingency theory. describe how path-goal theory works. discuss Hersey and Blanchard’s Situational Leadership theory. explain the normative decision theory.
PUTTING LEADERS IN THE RIGHT SITUATION: FIEDLER’S CONTINGENCY THEORY
Fiedler’s contingency theory states that in order to maximize work group performance, leaders must be matched to the right leadership situation.27 More specifically, as shown in Exhibit 14.5, the first basic assumption of Fiedler’s theory is that leaders are effective when the work groups they lead perform well. So, instead of judging leaders’ effectiveness by what the leaders do (i.e., initiating structure and consideration) or who they are (i.e., trait theory), Fiedler assesses leaders by the conduct and performance of the people they supervise. Second, Fiedler assumes that leaders are generally unable to change their leadership styles and that they will be more effective when their styles are matched to the proper situation. Third, Fiedler assumes that the favorableness of a situation for a leader depends on the degree to which the situation permits the leader to influence the behavior of group members. Thus, Fiedler’s third assumption is consistent with our definition of leadership, which is the process of influencing others to achieve group or organizational goals. Let’s learn more about Fiedler’s contingency theory by examining 3.1 the least preferred coworker and leadership styles, 3.2 situational favorableness, and 3.3 how to match leadership styles to situations.
3.1 Leadership Style: Least Preferred Coworker When Fiedler refers to leadership style, he means the way that leaders generally behave toward their followers. Do the leaders yell and scream and blame others when things go wrong? Or do they correct mistakes by listening and then quietly, but directly making their point? Do they take credit for others’ work when things go right? Or do they make sure that those who did the work receive the credit they rightfully deserve? Do they let others make their own decisions and hold them accountable for the results? Or do they micromanage, insisting that all decisions be approved first by them? Fiedler also assumes that leadership styles are tied to leaders’ underlying needs and personalities. And since personExhibit 14.5 ality and needs are relatively stable, he assumes that leaders are generally incaFiedler’s Contingency Theory pable of changing their leadership styles. In other words, the way that leaders treat people now is probably the way they’ve always treated others. So, according to Fiedler, if your boss’s first instinct is to yell and scream and blame others, chances are he or she has always done that. Leadership Group Style Fiedler uses a questionnaire called the Least Preferred = Performance Coworker (LPC) scale to measure leadership style (sample shown Situational in exhibit 14.6). When completing the LPC scale, people are inFavorableness structed to consider all of the people with whom they have ever worked and then to choose the one person with whom they “have worked LEAST well.” Fiedler explains, “This does not have to be the person you liked least well, but should be the one person with Good fit makes for higher whom you have the most trouble getting the job done.”28 performance levels.
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Pleasant
___ 8
___ 7
___ 6
___ 5
___ 4
___ 3
___ 2
___ 1
Unpleasant
Friendly
___ 8
___ 7
___ 6
___ 5
___ 4
___ 3
___ 2
___ 1
Unfriendly
Supportive
___ 8
___ 7
___ 6
___ 5
___ 4
___ 3
___ 2
___ 1
Hostile
Boring
___ 1
___ 2
___ 3
___ 4
___ 5
___ 6
___ 7
___ 8
Interesting
Gloomy
___ 1
___ 2
___ 3
___ 4
___ 5
___ 6
___ 7
___ 8
Cheerful
Insincere
___ 1
___ 2
___ 3
___ 4
___ 5
___ 6
___ 7
___ 8
Sincere
Source: F. E. Fiedler & M. M. Chemers, Improving Leadership Effectiveness: The Leader Match Concept, 2nd ed. (New York: John Wiley & Sons, 1984). Available at http://depts.washington.edu/psych/faculty/*cv/fiedler_cv.pdf, 23 March 2002. Reprinted by permission of the authors.
Would you describe your LPC as pleasant, friendly, supportive, interesting, cheerful, and sincere? Or would you describe the person as unpleasant, unfriendly, hostile, boring, gloomy, and insincere? (The Self-Assessment Appendix contains the full LPC scale on page 622.) People who describe their LPC in a positive way (scoring 64 and above) have relationship-oriented leadership styles. After all, if they can still be positive about their least preferred coworker, they must be people oriented. By contrast, people who describe their LPC in a negative way (scoring 57 or below) have task-oriented leadership styles. Given a choice, they’ll focus first on getting the job done and second on making sure everyone gets along. Finally, those with moderate scores (from 58 to 63) have a more flexible leadership style and can be somewhat relationship oriented or somewhat task oriented.
Exhibit 14.6 Sample from Fiedler’s Least Preferred Coworker Scale
3.2 Situational Favorableness Fiedler assumes that leaders will be more effective when their leadership styles are matched to the proper situation. More specifically, Fiedler defines situational favorableness as the degree to which a particular situation either permits or denies a leader the chance to influence the behavior of group members.29 In highly favorable situations, leaders find that their actions influence followers, but in highly unfavorable situations, leaders have little or no success influencing the people they are trying to lead. Three situational factors determine the favorability of a situation: leadermember relations, task structure, and position power. The most important situational factor is leader-member relations, which refers to how well followers respect, trust, and like their leaders. When leader-member relations are good, followers trust the leader and there is a friendly work atmosphere. Such was the case under Gordon Bethune, CEO of Continental Airlines for ten years. Joe Caudle, a Continental employee, says, “I’ve worked under a lot of presidents and CEOs. When the others came around, the employees would be ducking out. But with him, it’s ‘Hey, Bethune’s upstairs!’ They start smiling and want to shake his hand.”30 Task structure is the degree to which the requirements of a subordinate’s tasks are clearly specified. With highly structured tasks, employees have clear job responsibilities, goals, and procedures. Position power is the degree to which leaders are able to hire, fire, reward, and punish workers. The more influence leaders have over hiring, firing, rewards, and punishments, the greater their power.
situational favorableness The degree to which a particular situation either permits or denies a leader the chance to influence the behavior of group members.
leader-member relations The degree to which followers respect, trust, and like their leaders.
task structure The degree to which the requirements of a subordinate’s tasks are clearly specified.
position power The degree to which leaders are able to hire, fire, reward, and punish workers.
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Leader-Member Relations
Good
Good
Good
Good
Poor
Poor
Poor
Poor
Task Structure
High
High
Low
Low
High
High
Low
Low
Position Power
Strong
Weak
Strong
Weak
Strong
Weak
Strong
Weak
Situation
I
II
III
IV
V
VI
VII
VIII
Favorable
Moderately Favorable
Unfavorable
Exhibit 14.7 Situational Favorableness
Exhibit 14.7 shows how leader-member relations, task structure, and position power can be combined into eight situations that differ in their favorability to leaders. In general, Situation I, on the left side of Exhibit 14.7, is the most favorable leader situation. Followers like and trust their leaders and know what to do because their tasks are highly structured. Also, the leaders have the formal power to influence workers through hiring, firing, rewarding, and punishing them. Therefore, in Situation I, it’s relatively easy for a leader to influence followers. By contrast, Situation VIII, on the right side of Exhibit 14.7, is the least favorable situation for leaders. Followers don’t like or trust their leaders. Plus, followers are not sure what they’re supposed to be doing, given that their tasks or jobs are highly unstructured. Finally, leaders find it difficult to influence followers because they don’t have the ability to hire, fire, reward, or punish the people who work for them. In short, it’s very difficult to influence followers given the conditions found in Situation VIII.
3.3 Matching Leadership Styles to Situations After studying thousands of leaders and followers in hundreds of different situations, Fiedler found that the performance of relationship- and task-oriented leaders followed the pattern displayed in Exhibit 14.8. Relationship-oriented leaders with high LPC scores were better leaders (i.e., their groups performed more effectively) under moderately favorable situations. In moderately favorable situations, the leader may be liked somewhat, tasks may be somewhat structured, and the leader may have some position power. In this situation, a relationship-oriented leader improves leader-member relations, which is the most important of the three situational factors. In turn, morale and performance improve. How did Gordon Bethune turn around Continental Airlines and its previously poisonous labor-management relations? Bethune explained it this way: “When I was a mechanic, I knew how much faster I could fix an airplane when I wanted to fix it than when I didn’t. I’ve tried to make it so our guys want to do it.”31 By contrast, as Exhibit 14.8 shows, task-oriented leaders with low LPC scores are better leaders in highly favorable and unfavorable situations. Task-oriented leaders do well in favorable situations where leaders are liked, tasks are structured, and the leader has the power to hire, fire, reward, and punish. In these favorable situations, task-oriented leaders effectively step on the gas of a well-tuned car that’s in perfect running condition. Their focus on performance sets the goal for the group, which then charges forward to meet it. But task-oriented leaders also do well in unfavorable situations where leaders are disliked, tasks are unstructured, and the leader doesn’t have the power to hire, fire, reward, and punish. In these unfavorable situations, the task-oriented leader sets goals, which focus attention on performance, and clarifies what needs to be done, thus overcoming low task structure. This is enough to jump-start performance, even if workers don’t like or trust the leader. Finally, though not shown in Exhibit 14.8, people with moderate LPC scores, who can be somewhat relationship oriented or somewhat task oriented, tend to do fairly well in all situations because they can adapt their behavior. Typically, though, they don’t perform quite as well as relationship-oriented or task-oriented leaders whose leadership styles are well matched to the situation.
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Group Performance
Good
Poor
Leader-Member Relations
Good
Good
Good
Good
Poor
Poor
Poor
Poor
Task Structure
High
High
Low
Low
High
High
Low
Low
Position Power
Strong
Weak
Situation
I
II
Favorable
Strong Weak III
IV
Strong
Weak
V
VI
Strong Weak
Moderately Favorable
TaskOriented Leaders
RelationshipOriented Leaders
VII
VIII Unfavorable
Exhibit 14.8
Recall, however, that Fiedler assumes that leaders are incapable of changing their leadership styles. Accordingly, the key to applying Fiedler’s contingency theory in the workplace is to accurately measure and match leaders to situations or to teach leaders how to change situational favorableness by changing leadermember relations, task structure, or position power. Though matching or placing leaders in appropriate situations works particularly well, practicing managers have had little luck with “reengineering situations” to fit their leadership styles. The primary problem, as you’ve no doubt realized, is the complexity of the theory. In a study designed to teach leaders how to reengineer their situations to fit their leadership styles, Fiedler found that most of the leaders simply did not understand what they were supposed to do to change their leadership situations. Furthermore, if they didn’t like their LPC profile (perhaps they felt they were more relationship oriented than their scores indicated), they arbitrarily changed it to better suit their view of themselves. Of course, the theory won’t work as well if leaders are attempting to change situational factors to fit their perceived leadership style and not their real leadership style.32
Matching Leadership Styles to Situations
Review 3: Putting Leaders in the Right Situation: Fiedler’s Contingency Theory Fiedler’s theory assumes that leaders are effective when their work groups perform well, that leaders are unable to change their leadership styles, that leadership styles must be matched to the proper situation, and that favorable situations permit leaders to influence group members. According to the Least Preferred Coworker (LPC) scale, there are two basic leadership styles. People who describe their LPC in a positive way have relationship-oriented leadership styles. By contrast, people who describe their LPC in a negative way have taskoriented leadership styles. Situational favorableness, which occurs when leaders can influence followers is determined by leader-member relations, task structure, and position power. In general, relationship-oriented leaders with high LPC scores are better leaders under moderately favorable situations, while taskoriented leaders with low LPC scores are better leaders in highly favorable and unfavorable situations. Since Fiedler assumes that leaders are incapable of changing their leadership styles, the key is to accurately measure and match leaders to situations or to teach leaders how to change situational factors. Though matching or placing leaders in appropriate situations works well, “reengineering situations” to fit leadership styles doesn’t because of the complexity of the model, which makes it difficult for people to understand. 4
ADAPTING LEADER BEHAVIOR: PATH-GOAL THEORY
Just as its name suggests, path-goal theory states that leaders can increase subordinate satisfaction and performance by clarifying and clearing the paths to goals and by increasing the number and kinds of rewards available for goal attainment. Said another way, leaders need to clarify how followers can achieve
path-goal theory A leadership theory that states that leaders can increase subordinate satisfaction and performance by clarifying and clearing the paths to goals and by increasing the number and kinds of rewards available for goal attainment.
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organizational goals, take care of problems that prevent followers from achieving goals, and then find more and varied rewards to • Clear paths to goals by solving problems motivate followers to achieve those goals.33 and removing roadblocks. For path clarification, path clearing, and rewards to increase • Increase the number and kinds of rewards followers’ motivation and effort, however, leaders must meet two available for goal attainment. conditions. First, leader behavior must be a source of immediate or future satisfaction for followers. Therefore, the things you do as a • Do things that satisfy followers today or leader must please your followers today or lead to activities or rewill lead to future rewards or satisfaction. wards that will satisfy them in the future. For example, Carla • Offer followers something unique and Jones, who works in marketing for Edward Jones, the St. valuable beyond what they’re experiencing Louis–based investment company that has been near the top of or can already do for themselves. Fortune’s list of the top 100 companies to work for, hasn’t looked Source: R. J. House & T. R. Mitchell, “Path-Goal Theory of Leadership,” Journal of Contemporary Business 3 (1974): 81–97. outside the company for career opportunities since she joined the company 14 years ago. Indeed, Edward Jones’ management does Exhibit 14.9 such a good job of satisfying its workers that a phenomenal 83 percent of its asBasic Assumptions of Path-Goal sociates plan to work there until they retire.34 Theory Second, while providing the coaching, guidance, support, and rewards necessary for effective work performance, leader behaviors must complement and directive leadership not duplicate the characteristics of followers’ work environments. Thus, leader A leadership style in which the leader behaviors must offer something unique and valuable to followers beyond what lets employees know precisely what is they’re already experiencing as they do their jobs or what they can already do for expected of them, gives them specific guidelines for performing tasks, themselves. Exhibit 14.9 summarizes these basic assumptions of path-goal theory. schedules work, sets standards of In contrast to Fiedler’s contingency theory, path-goal theory assumes that performance, and makes sure that leaders can change and adapt their leadership styles. Exhibit 14.10 illustrates this people follow standard rules and process, showing that leaders change and adapt their leadership styles contingent regulations. on their subordinates or the environment in which those subordinates work. • Clarify paths to goals.
supportive leadership A leadership style in which the leader is friendly and approachable, shows concern for employees and their welfare, treats them as equals, and creates a friendly climate.
Let’s learn more about path-goal theory by examining 4.1 the four kinds of leadership styles that leaders use, 4.2 the subordinate and environmental contingency factors that determine when different leader styles are effective, and 4.3 the outcomes of path-goal theory in improving employee satisfaction and performance.
4.1 Leadership Styles As illustrated in Exhibit 14.10, the four leadership styles in path-goal theory are directive, supportive, participative, and achievement oriented.35 Directive leadership involves letting employees know precisely what is expected of them, giving them specific guidelines for performing tasks, scheduling work, setting standards of performance, and making sure that people follow standard rules and regulations. For example, “each month, Audi’s compulsive chief executive, Martin Winterkorn, rolls up his sleeves and leads a trouble-shooting session with managers and engineers at the company’s electronics center, zeroing in on faulty systems and problem parts. Winterkorn’s rules: no shifting the blame to anyone else, such as suppliers. No phone calls to subordinates—the brains to remedy the defects better be in the room. And no one leaves until a fix is found.”36 Why is Winterkorn so demanding (i.e., directive)? As he explains, “We want [Audi] to be the No. 1 premium [car] brand,” and you don’t achieve that goal easily when you’re competing with Lexus, Mercedes, BMW, and Acura. Supportive leadership involves being friendly to and approachable by employees, showing concern for them and their welfare, treating them as equals, and creating a friendly climate. Supportive ©˙BALAZS GARDI/REUTERS/CORBIS
In addition to being a directive leader, Audi president Martin Winterkorn has deep technical knowledge in his field, which gives him credibility when he assigns work and sets goals and procedures. Winterkorn is shown here giving a lecture on car design concepts at the Budapest Technical University.
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leadership is very similar to considerate leader behavior. Supportive leadership often results in employee satisfaction with the job and with Subordinate Contingencies leaders. This leadership style may also result • Perceived Ability in improved performance when it increases • Locus of Control employee confidence, lowers employee job • Experience stress, or improves relations and trust between employees and leaders.37 For example, husLeadership Styles Outcomes band and wife Shane and Allison Alexander • Directive • Subordinate Satisfaction both work for Wal-Mart in Madisonville, • Supportive • Subordinate Performance Kentucky. Over the years, the Wal-Mart man• Participative • Achievement-Oriented agers in their store have shown concern for them in a number of important ways. For example, since the Alexanders had only one Environmental Contingencies car, Wal-Mart managers scheduled them for • Task Structure alternating shifts, which also allowed them to • Formal Authority System care for their baby without outside help, and • Primary Work Group made sure the couple had some Saturdays off to spend time as a family.38 Exhibit 14.10 Participative leadership involves consulting Path-Goal Theory employees for their suggestions and input before making decisions. Participation in decision making should help followers understand which goals are participative leadership most important and clarify the paths to accomplishing them. Furthermore, A leadership style in which the leader when people participate in decisions, they become more committed to making consults employees for their them work. At the customer call center at United Kingdom–based Kwik-Fit suggestions and input before making Financial Services, managers were overly aggressive, annual employee decisions. turnover was 52 percent, and employees were not consulted about anything. When Kwik-Fit changed to a highly participative approach, managers met with all 650 employees in small groups and asked them what it would take to make the call center a good place to work. After those initial discussions, seven project groups, which included people from across the company, began addressing problems in facilities, incentives, pay, management style, management processes, and customer service. Today, because of those project groups, Kwik-Fit has an improved flexible benefits plan; flextime work scheduling; a “chillout” room with a TV, video game machine, pool table, and air hockey table; a concierge to take care of employees’ nonwork tasks (dry cleaning, running to the bank); and new phone/customer software for doing their jobs. As a result of these employee-suggested changes, employee turnover has fallen to 35 percent, 66 percent of employees (up from 40 percent) recommend Kwik-Fit as a place to work, customer complaints are down 50 percent, customer satisfaction has risen from 90 to 94 percent, and profits are up by 50 percent.39 Achievement-oriented leadership means setting challenging goals, having high achievement-oriented leadership expectations of employees, and displaying confidence that employees will A leadership style in which the leader assume responsibility and put forth extraordinary effort. After GM announced sets challenging goals, has high expectations of employees, and displays it would close its Wilmington, Delaware plant to cut costs, plant manager confidence that employees will assume Ralph Harding told his 3,500 workers, “There may be nothing we can do to responsibility and put forth extraordiaffect this decision. But there is something we can do: We can make them feel nary effort. really stupid! Because they are going to be closing the best plant in General Motors!”40 “Be the Best!” slogans were posted throughout the plant, and “Be the Best!” jackets were given to all employees. Responding to Harding’s challenge, employee groups began systematically making changes to increase quality and lower costs. Two years later GM decided to keep the plant open because it now had the company’s lowest costs and highest quality (as measured by warranty claims).
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4.2 Subordinate and Environmental Contingencies As shown in Exhibit 14.10, path-goal theory specifies that leader behaviors should be fitted to subordinate characteristics. The theory identifies three kinds of subordinate contingencies: perceived ability, experience, and locus of control. Perceived ability is simply how much ability subordinates believe they have for doing their jobs well. Subordinates who perceive that they have a great deal of ability will be dissatisfied with directive leader behaviors. Experienced employees are likely to react in a similar way. Since they already know how to do their jobs (or perceive that they do), they don’t need or want close supervision. By contrast, subordinates with little experience or little perceived ability will welcome directive leadership. Locus of control is a personality measure that indicates the extent to which people believe that they have control over what happens to them in life. Internals believe that what happens to them, good or bad, is largely a result of their choices and actions. Externals, on the other hand, believe that what happens to them is caused by external forces beyond their control. Accordingly, externals are much more comfortable with a directive leadership style, while internals greatly prefer a participative leadership style because they like to have a say in what goes on at work. Path-goal theory specifies that leader behaviors should complement rather than duplicate the characteristics of followers’ work environments. There are three kinds of environmental contingencies: task structure, the formal authority system, and the primary work group. As in Fiedler’s contingency theory, task structure is the degree to which the requirements of a subordinate’s tasks are clearly specified. When task structure is low and tasks are unclear, directive leadership should be used because it complements the work environment. When task structure is high and tasks are clear, however, directive leadership is not needed because it duplicates what task structure provides. Alternatively, when tasks are stressful, frustrating, or dissatisfying, leaders should respond with supportive leadership. The formal authority system is an organization’s set of procedures, rules, and policies. When the formal authority system is unclear, directive leadership complements the situation by reducing uncertainty and increasing clarity. But, when the formal authority system is clear, directive leadership is redundant and should not be used. Primary work group refers to the amount of work-oriented participation or emotional support that is provided by an employee’s immediate work group. Participative leadership should be used when tasks are complex and there is little existing work-oriented participation in the primary work group. When tasks are stressful, frustrating, or repetitive, supportive leadership is called for. Finally, since keeping track of all of these subordinate and environmental contingencies can get a bit confusing, Exhibit 14.11 provides a summary of when directive, supportive, participative, and achievement-oriented leadership styles should be used.
4.3 Outcomes Does following path-goal theory improve subordinate satisfaction and performance? Preliminary evidence suggests that it does.41 In particular, people who work for supportive leaders are much more satisfied with their jobs and their bosses. Likewise, people who work for directive leaders are more satisfied with their jobs and bosses (but not quite as much as when their bosses are supportive) and perform their jobs better, too. Does adapting one’s leadership style to subordinate and environmental characteristics improve subordinate satisfaction and performance? At this point, because of the difficulty of completely testing this complex theory, it’s too early to tell.42 However, since the data clearly show that it makes sense for leaders to be both supportive and directive, it also makes
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467
SUPPORTIVE LEADERSHIP
PARTICIPATIVE LEADERSHIP
Unstructured tasks
Structured, simple, repetitive tasks
Experienced workers
Inexperienced workers
Stressful, frustrating tasks
Workers with high perceived ability
Workers with low perceived ability
When workers lack confidence
Workers with internal locus of control
Workers with external locus of control
Clear formal authority system
Workers not satisfied with rewards
Unclear formal authority system
ACHIEVEMENT-ORIENTED LEADERSHIP
Unchallenging tasks
Complex tasks
sense that leaders could improve subordinate satisfaction and performance by adding participative and achievement-oriented leadership styles to their capabilities as leaders.
Exhibit 14.11 Path-Goal Theory: When to Use Directive, Supportive, Participative, or Achievement-Oriented Leadership
Review 4: Adapting Leader Behavior: Path-Goal Theory Path-goal theory states that leaders can increase subordinate satisfaction and performance by clarifying and clearing the paths to goals and by increasing the number and kinds of rewards available for goal attainment. For this to work, however, leader behavior must be a source of immediate or future satisfaction for followers and must complement and not duplicate the characteristics of followers’ work environments. In contrast to Fiedler’s contingency theory, pathgoal theory assumes that leaders can and do change and adapt their leadership styles (directive, supportive, participative, and achievement oriented), depending on their subordinates (experience, perceived ability, internal or external) or the environment in which those subordinates work (task structure, formal authority system, or primary work group). 5
ADAPTING LEADER BEHAVIOR: HERSEY AND BLANCHARD’S SITUATIONAL LEADERSHIP® THEORY*
Have you ever had a new job that you didn’t know how to do and your boss was not around to help you learn it? Conversely, have you ever known exactly how to do your job but your boss kept treating you as though you didn’t? Hersey and Blanchard’s Situational Leadership theory is based on the idea of follower readiness. Hersey and Blanchard argue that employees have different levels of readiness for handling different jobs, responsibilities, and work assignments. Accordingly, Hersey and Blanchard’s situational theory states that leaders need to adjust their leadership styles to match followers’ readiness.43 Let’s learn more about Hersey and Blanchard’s situational theory by examining 5.1 worker readiness and 5.2 different leadership styles.
situational theory A leadership theory that states that leaders need to adjust their leadership styles to match their follower’s readiness.
5.1 Worker Readiness Worker readiness is the ability and willingness to take responsibility for directing one’s behavior at work. Readiness is composed of two components. Job readiness consists of the amount of knowledge, skill, ability, and experience people have to perform their jobs. As you would expect, people with greater skill, ability, and experience do a better job of supervising their own work. Psychological readiness, on the other hand, is a feeling of self-confidence or * Situational Leadership® is a registered trademark of the Center for Leadership Studies.
worker readiness The ability and willingness to take responsibility for directing one’s behavior at work.
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self-respect. Likewise, confident people are better at guiding their own work than insecure people are. Job readiness and psychological readiness are combined to produce four different levels of readiness in Hersey and Blanchard’s Situational Leadership theory. The lowest level, R1, represents insecure people who are neither willing nor able to take responsibility for guiding their own work. R2 represents people who are confident and willing but not able to take responsibility for guiding their own work. R3 represents people who are insecure and able but not willing to take responsibility for guiding their own work. And R4 represents people who are confident and willing and able to take responsibility for guiding their own work. It’s important to note that a follower’s readiness is usually task specific. For example, you may be highly confident and capable when it comes to personal computers, but know nothing about setting up budgets for planning purposes. Thus, you would possess readiness (R4) with respect to computers and but not with respect to budgets.
5.2 Leadership Styles Similar to Blake and Mouton’s managerial grid, situational theory defines leadership styles in terms of task behavior (i.e., concern for production) and relationship behavior (i.e., concern for people). These two behaviors can be combined to form four different leadership styles: telling, selling, participating, and delegating. Leaders choose one of these styles depending on the readiness a follower has for a specific task. A telling leadership style (high task behavior and low relationship behavior) is based on one-way communication, in which followers are told what, how, when, and where to do particular tasks. Telling is used when people are at the R1 stage. For instance, someone using a telling leadership style would identify all the steps in a project and give explicit instructions on exactly how to execute each one. A selling leadership style (high task behavior and high relationship behavior) involves two-way communication and psychological support to encourage followers to “own” or “buy into” particular ways of doing things. Selling is used most appropriately at the R2 stage. For instance, someone using a selling leadership style might say, “We’re going to start a company newsletter. I really think that’s a great idea, don’t you? We’re going to need some cost estimates from printers and some comments from each manager. But that’s pretty straightforward. Oh, don’t forget that we need the CEO’s comments, too. She’s expecting you to call. I know that you’ll do a great job on this. We’ll meet next Tuesday to see if you have any questions once you’ve dug into this. By the way, we need to have this done by next Friday.” A participating style (low task behavior and high relationship behavior) is based on two-way communication and shared decision making. Participating is used with employees at R3. Since the problem is with motivation and not ability, someone using a participating leadership style might solicit ideas from a subordinate about a project, let the subordinate get started, but ask to review progress along the way. A delegating style (low task behavior and low relationship behavior) is used when leaders basically let workers “run their own show” and make their own decisions. Delegating is used for people at R4. For instance, someone using a delegating leadership style might say, “We’re going to start a company newsletter. You’ve got 10 days to do it. Run with it. Let me know when you’ve got it done. I’ll email you a couple of ideas, but other than that, do what you think is best. Thanks.” In general, as people become more “ready,” and thus more willing and able to guide their own behavior, leaders should become less task oriented and more relationship oriented. Then, as people become even more “ready,” leaders
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should become both less task oriented and less relationship oriented until people eventually manage their own work with little input from their leaders. How well does Hersey and Blanchard’s situational theory work? Despite its intuitive appeal (managers and consultants tend to prefer it over Fiedler’s contingency theory because of its underlying logic and simplicity), most studies don’t support situational theory.44 While managers generally do a good job of judging followers’ readiness levels, the theory doesn’t seem to work well, except at lower levels, where a telling style is recommended for people who are insecure and neither willing nor able to take responsibility for guiding their own work.45
Review 5: Adapting Leader Behavior: Hersey and Blanchard’s Situational Leadership Theory According to situational theory, leaders need to adjust their leadership styles to match their followers’ readiness, which is the ability (job readiness) and willingness (psychological readiness) to take responsibility for directing one’s work. Job readiness and psychological readiness combine to produce four different levels of readiness (R1–R4), which vary based on people’s confidence, ability, and willingness to guide their own work. Situational theory combines task and relationship behavior to create four leadership styles—telling (R1), selling (R2), participating (R3), and delegating (R4)—that are used with employees at different readiness levels. 6
ADAPTING LEADER BEHAVIOR: NORMATIVE DECISION THEORY
For years, your company has insisted on formal business attire for men and women. Now, however, you want to make a change to casual wear. Do you make the decision yourself and announce it, or do you consult your employees before making the decision? To keep up with the exponential growth in one of your sales regions, you’re going to cut the region in half, add staff, and effectively reduce the earnings of its sales representatives and managers. Do you make the decision yourself, announce it, and then live with the backlash? Do you consult all of your regional managers before making this decision? Or do you go straight to the people in the region to let them know about your concerns? Many people believe that making tough decisions is at the heart of leadership. Yet experienced leaders will tell you that deciding how to make decisions is just as important. The normative decision theory (also known as the VroomYetton-Jago model) helps leaders decide how much employee participation (from none to letting employees make the entire decision) should be used when making decisions.46 Let’s learn more about normative decision theory by investigating 6.1 decision styles and 6.2 decision quality and acceptance.
6.1 Decision Styles Unlike nearly all of the other leadership theories discussed in this chapter, which have specified leadership styles, that is, the way a leader generally behaves toward followers, the normative decision theory specifies five different decision styles or ways of making decisions. (See Chapter 5 for a more complete review of decision making in organizations.) As shown in Exhibit 14.12, those styles vary from autocratic decisions (AI or AII) on the left, in which leaders make the decisions by themselves, to consultative decisions (CI or CII), in which leaders share problems with subordinates but still make the decisions themselves, to group decisions (GII) on the right, in which leaders share the problems with
normative decision theory A theory that suggests how leaders can determine an appropriate amount of employee participation when making decisions.
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Leader is willing to accept any decision supported by the entire group
Leader solves the problem or makes the decision
AI Using information available at the time, the leader solves the problem or makes the decision.
AII The leader obtains necessary information from employees, and then selects a solution to the problem. When asked to share information, employees may or may not be told what the problem is.
CI The leader shares the problem and gets ideas and suggestions from relevant employees on an individual basis. Individuals are not brought together as a group. Then the leader makes the decision, which may or may not reflect their input.
CII The leader shares the problem with employees as a group, obtains their ideas and suggestions, and then makes the decision, which may or may not reflect their input.
GII The leader shares the problem with employees as a group. Together, the leader and employees generate and evaluate alternatives and try to reach an agreement on a solution. The leader acts as a facilitator and does not try to influence the group. The leader is willing to accept and implement any solution that has the support of the entire group.
Source: Adapted from V. H. Vroom & P. W. Yetton, Leadership and Decision Making (Pittsburgh: University of Pittsburgh Press, 1973), 13.
Exhibit 14.12 Decision Styles and Levels of Employee Participation
subordinates and then have the group make the decisions. GE Aircraft Engines in Durham, North Carolina, uses this approach when making decisions. According to Fast Company magazine, “At GE/Durham, every decision is either an ‘A’ decision, a ‘B’ decision, or a ‘C’ decision. An ‘A’ decision is one that the plant manager makes herself, without consulting anyone.”47 Plant manager Paula Sims says, “I don’t make very many of those, and when I do make one, everyone at the plant knows it. I make maybe 10 or 12 a year.”48 “B” decisions are also made by the plant manager, but with input from the people affected. “C” decisions, the most common type, are made by consensus, by the people directly involved, with plenty of discussion. With “C” decisions, the view of the plant manager doesn’t necessarily carry more weight than the views of those affected.”49
6.2 Decision Quality and Acceptance According to the normative decision theory, using the right degree of employee participation improves the quality of decisions and the extent to which employees accept and are committed to decisions. Exhibit 14.13 lists the decision rules that normative decision theory uses to increase decision quality and employee acceptance and commitment. The quality, leader information, subordinate information, goal congruence, and problem structure rules are used to increase decision quality. For example, the leader information rule states that if a leader doesn’t have enough information to make a decision on his or her own, then the leader should not use an autocratic decision style. The commitment probability, subordinate conflict, and commitment requirement rules shown in Exhibit 14.13 are used to increase employee acceptance and commitment to decisions. For example, the commitment requirement rule says that if decision acceptance and commitment are important, and the subordinates share the organization’s goals, then you shouldn’t use an autocratic or consultative style. In other words, if followers want to do what’s best for the company and you need their acceptance and commitment to make a decision work, then use a group decision style and let them make the decision.
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DECISION RULES TO INCREASE DECISION QUALITY
Quality Rule. If the quality of the decision is important, then don’t use an autocratic decision style. Leader Information Rule. If the quality of the decision is important, and if the leader doesn’t have enough information to make the decision on his or her own, then don’t use an autocratic decision style. Subordinate Information Rule. If the quality of the decision is important, and if the subordinates don’t have enough information to make the decision themselves, then don’t use a group decision style. Goal Congruence Rule. If the quality of the decision is important, and subordinates’ goals are different from the organization’s goals, then don’t use a group decision style. Problem Structure Rule. If the quality of the decision is important, the leader doesn’t have enough information to make the decision on his or her own, and the problem is unstructured, then don’t use an autocratic decision style. DECISION RULES TO INCREASE DECISION ACCEPTANCE
Commitment Probability Rule. If having subordinates accept and commit to the decision is important, then don’t use an autocratic decision style. Subordinate Conflict Rule. If having subordinates accept the decision is important and critical to successful implementation and subordinates are likely to disagree or end up in conflict over the decision, then don’t use an autocratic or consultative decision style. Commitment Requirement Rule. If having subordinates accept the decision is absolutely required for successful implementation and subordinates share the organization’s goals, then don’t use an autocratic or consultative style. Sources: Adapted from V. H. Vroom, “Leadership,” in Handbook of Industrial and Organizational Psychology, ed. M. D. Dunnette (Chicago: Rand McNally, 1976); V. H. Vroom & A. G. Jago, The New Leadership: Managing Participation in Organizations (Englewood Cliffs, NJ: Prentice Hall, 1988).
Exhibit 14.13
As you can see, these decision rules help leaders improve decision quality and follower acceptance and commitment by eliminating decision styles that don’t fit the decision or situation they’re facing. Normative decision theory then operationalizes these decision rules in the form of yes/no questions, which are shown in the decision tree displayed in Exhibit 14.14. You start at the left side of the model and answer the first question, “How important is the technical quality of this decision?” by choosing “high” or “low.” Then you continue by answering each question as you proceed along the decision tree until you get to a recommended decision style. Let’s use the model to make the decision of whether to change from a formal business attire policy to a casual wear policy. The problem sounds simple, but it is actually more complex than you might think. Follow the yellow line in Exhibit 14.14 as we work through the decision in the discussion below.
Problem: Change to Casual Wear? 1. Quality requirement: How important is the technical quality of this decision? High. This question has to do with whether there are quality differences in the alternatives and whether those quality differences matter. Although most people would assume that quality isn’t an issue here, it really is, given the overall positive changes that generally accompany changes to casual wear. 2. Commitment requirement: How important is subordinate commitment to the decision? High. Changes in culture, like dress codes, require subordinate commitment or they fail. 3. Leader’s information: Do you have sufficient information to make a highquality decision? Yes. Let’s assume that you’ve done your homework. Much has been written about casual wear, from how to make the change to the effects it has in companies (almost all positive).
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4. Commitment probability: If you were to make the decision by yourself, is it reasonably certain that your subordinate(s) would be committed to the decision? No. Studies of casual wear (see item 3, leader information) find that employees’ reactions are almost uniformly positive. Nonetheless, employees are likely to be angry if you change something as personal as clothing policies without consulting them. 5. Goal congruence: Do subordinates share the organizational goals to be attained in solving this problem? Yes. The goals that usually accompany a change to casual dress policies are a more informal culture, better communication, and less money spent on business attire. 6. Subordinate information: Do subordinates have sufficient information to make a high-quality decision? No. Most employees know little about casual wear policies or even what constitutes casual wear in most companies. Consequently, most companies have to educate employees about casual wear practices and policies before making a decision. 7. CII is the answer: With a CII, or consultative decision process, the leader shares the problem with employees as a group, obtains their ideas and suggestions, and then makes the decision, which may or may not reflect their input. So, given the answers to these questions (remember, different managers won’t necessarily answer these questions the same way), the normative decision theory recommends that leaders consult with their subordinates before deciding whether to change to a casual wear policy. How well does the normative decision theory work? A prominent leadership scholar has described it as the best supported of all leadership theories.50 In general, the more managers violate the decision rules in Exhibit 14.13, the less effective their decisions are, especially with respect to subordinate acceptance and commitment.51
Review 6: Adapting Leader Behavior: Normative Decision Theory The normative decision theory helps leaders decide how much employee participation should be used when making decisions. Using the right degree of employee participation improves the quality of decisions and the extent to which employees accept and are committed to decisions. The theory specifies five different decision styles or ways of making decisions: autocratic decisions (AI or AII), consultative decisions (CI or CII), and group decisions (GII). The theory improves decision quality via the quality, leader information, subordinate information, goal congruence, and unstructured problem decision rules. The theory improves employee commitment and acceptance via the commitment probability, subordinate conflict, and commitment requirement decision rules. These decision rules help leaders improve decision quality and follower acceptance and commitment by eliminating decision styles that don’t fit the decision or situation they’re facing. Normative decision theory then operationalizes these decision rules in the form of yes/no questions, as shown in the decision tree displayed in Exhibit 14.14.
Strategic Leadership Thus far, you have read about three major leadership ideas: traits, behaviors, and situational theories. Leader traits are relatively stable characteristics, such as abilities or psychological motives. Traits capture who effective leaders are. Leader behaviors are the actions leaders take to influence others to achieve group or organizational goals. Behaviors capture what effective leaders do (i.e., initiate structure and consideration). And situational theories indicate that the effectiveness of a leadership style, the way a leader generally behaves toward followers, depends on the situation. Situational theories capture what leaders
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Leadership Style Yes
CP
Yes
No
Yes
SI
GC
No
No Yes
Ye s
CP GC
No
Ye s
No
GII No
H
LI
PS
No
Yes
No
CO
CII AII
No
GC No
Yes
Yes
GC
CP Yes Lo w
SI S1
CO PS
H ig h
CR
No
Yes
No
No
ig h
LI
CII
No
No
AI GII
Yes
CI CII
Yes
State QR Low the Problem
AI
Low
CR High
CP
Yes
GII
No
Problem Attributes QR
Quality requirement:
CR
Commitment requirement: How important is subordinate commitment to the decision?
LI
Leader’s information:
Do you have sufficient information to make a high-quality decision?
PS
Problem structure:
Is the problem well structured?
CP
Commitment probability: If you were to make the decision by yourself, is it reasonably certain that your subordinate(s) would be committed to the decision?
GC
Goal congruence:
Do subordinates share the organizational goals to be attained in solving this problem?
CO
Subordinate conflict:
Is conflict among subordinates over preferred solutions likely?
SI
Subordinate information: Do subordinates have sufficient information to make a high-quality decision?
How important is the technical quality of this decision?
Source: V. H. Vroom & P. W. Yetton, Leadership and Decision Making (Pittsburgh, University of Pittsburgh Press, 1973). Adapted and reprinted by permission of University of Pittsburgh Press.
Exhibit 14.14 Normative Decision Theory Tree for Determining the Level of Participation in Decision Making
need to do or not do in particular situations or circumstances. This final part of the chapter introduces a fourth major leadership idea—strategic leadership— strategic leadership and its components: visionary, charismatic, and transformational leadership. Strategic leadership is the ability to anticipate, envision, maintain flexibility, The ability to anticipate, envision, maintain flexibility, think strategically, think strategically, and work with others to initiate changes that will and work with others to initiate 52 create a positive future for an organization. Over the last 25 years, every - changes that will create a positive dollar invested in Walgreen’s—that’s right, plain old Walgreen’s, the drugstore future for an organization.
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chain—would be worth twice as much as a dollar invested in Intel, five times as much as a dollar invested in General Electric, eight times as much as a dollar invested in Coca-Cola, and 15 times as much as a dollar invested in the general stock market. During that time, CEO Charles Walgreen III transformed the company by focusing Walgreen’s managers and employees on the strategic objective of “providing the best drugstore service in America.” While that seems rather unremarkable today given Walgreen’s current success, adopting that objective completely changed the company because it led to the sale of its historic and highly profitable food service division started by his grandfather (for over 70 years, every Walgreen’s had a food counter that served breakfast, lunch, and dinner). Despite objections that this would destroy the company, Walgreen sold the profitable food division precisely because it didn’t fit the new strategic objective. Food service had nothing to do with drugstores and was a business in which Walgreen’s could not be “the best.” Furthermore, in achieving this remarkable transformation and success, “not once did Mr. Walgreen stand in front of the mirror and point to himself as a key factor, preferring instead to point out the window to credit the great people he had on his team.”53 Thus, strategic leadership captures how leaders inspire their companies to change and their followers to give extraordinary effort to accomplish organizational goals. 7
7 visionary leadership Leadership that creates a positive image of the future that motivates organizational members and provides direction for future planning and goal setting.
After reading the next section, you should be able to explain how visionary leadership (i.e., charismatic and transformational leadership) helps leaders achieve strategic leadership.
VISIONARY LEADERSHIP
In Chapter 5, we defined vision as a statement of a company’s purpose or reason for existing. Similarly, visionary leadership creates a positive image of the future that motivates organizational members and provides direction for future planning and goal setting.54 Two kinds of visionary leadership are 7.1 charismatic leadership and 7.2 transformational leadership.
7.1 Charismatic Leadership Charisma is a Greek word meaning “gift from God.” The Greeks saw people with charisma as divinely inspired and capable of incredible accomplishments. German sociologist Max Weber viewed charisma as a special bond between leaders and followers.55 Weber wrote that the special qualities of charismatic leaders enable them to strongly influence followers. For example, Richard Scrushy, a founder and the former CEO of HealthSouth, a worldwide provider of health care (outpatient surgery, diagnostic imaging, and rehabilitation), was undoubtedly a charismatic leader. Scrushy, who had a magnetic personality, personally recruited many of HealthSouth’s employees and top managers. Said one employee, “When he was talking, you could be hypnotized by him.”56 Dean Thomas Ratcliffe of Troy State University’s business school said, “Heck, I get goosebumps listening to him.”57 Weber also noted that charismatic leaders tend to emerge in times of crisis and that the radical solutions they propose enhance the admiration that followers feel for them. Indeed, charismatic leaders tend to have incredible influence over their followers, who may be inspired by their leaders and become fanatically devoted to them. From this perspective, charismatic leaders are often seen as larger-than-life or uniquely special. Charismatic leaders have strong, confident, dynamic personalities that attract followers and enable the leaders to create strong bonds with their followers. Followers trust charismatic leaders, are loyal to them, and are inspired to work toward the accomplishment of the leader’s vision. Followers
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who become devoted to charismatic leaders may go to extraordinary lengths to please them. Therefore, we can define charismatic leadership as the behavioral tendencies and personal characteristics of leaders that create an exceptionally strong relationship between them and their followers. Charismatic leaders also •
articulate a clear vision for the future that is based on strongly held values or morals, • model those values by acting in a way consistent with the vision, • communicate high performance expectations to followers, and • display confidence in followers’ abilities to achieve the vision.58
WIDE WORLD PHOTOS COLGATE
Does charismatic leadership work? Studies indicate that it often does. In general, the followers of charismatic leaders are more committed and satisfied, are better performers, are more likely to trust their leaders, and simply work harder.59 Nonetheless, charismatic leadership also risks that are at least as large as its benefits. The problems are likely to occur with ego-driven charismatic leaders who take advantage of fanatical followers. In general, there are two kinds of charismatic leaders, ethical charismatics and unethical charismatics.60 Ethical charismatics provide developmental opportunities for followers, are open to positive and negative feedback, recognize others’ contributions, share information, and have moral standards that emphasize the larger interests of the group, organization, or society. For example, Reuben Mark, the CEO of Colgate for two decades, is a very successful ethical charismatic ($10,000 invested in Colgate when he became CEO would now be worth $335,000).61 According to the Wall Street Journal, Mark “meets regularly with Colgate employees and is the corporate cheerleader, discussing Colgate’s core values: caring, continuous improvement and teamwork. ‘Love,’ he has said, according to people who have worked for him, ‘is a better motivator than fear.’”62 As you would expect, ethical charismatics produce stronger commitment, higher satisfaction, more effort, better performance, and greater trust. By contrast, unethical charismatics control and manipulate followers, do what is best for themselves instead of their organizations, want to hear only positive feedback, share only information that is beneficial to themselves, and have moral standards that put their interests before everyone else’s. Because followers can become just as committed to unethical charismatics as to ethical characteristics, unethical characteristics pose a tremendous risk for companies. Why? According to Fast Company, “We’re worshipful of top executives who seem charismatic, visionary, and tough. So long as they’re lifting profits and stock prices, we’re willing to overlook that they can also be callous, cunning, manipulative, deceitful, verbally and psychologically abusive, remorseless, exploitative, self-delusional, irresponsible, and megalomaniacal.”63 John Thompson, a management consultant, warns, “Often what begins as a mission becomes an obsession. Leaders can cut corners on values and become driven by selfinterest. Then they may abuse anyone who makes a mistake.”64 In terms of cutting corners and selfinterest, it’s hard to top the unethical charismatic behavior of former Enron Chief Financial Officer, Andrew Fastow, who Fast Company described as follows: “He pressured his bosses for a promotion to CFO even though he had a shaky grasp of the position’s basic responsibilities, such as accounting and treasury operations. Suffering delusions of grandeur after just a little time on the job, Fastow ordered Enron’s PR people to lobby CFO magazine to make him its CFO of the Year. But Fastow’s
charismatic leadership The behavioral tendencies and personal characteristics of leaders that create an exceptionally strong relationship between them and their followers.
ethical charismatics Charismatic leaders who provide developmental opportunities for followers, are open to positive and negative feedback, recognize others’ contributors, share information, and have moral standards that emphasize the larger interests of the group, organization, or society.
unethical charismatics Charismatic leaders who control and manipulate followers, do what is best for themselves instead of their organizations, want to hear only positive feedback, share only information that is beneficial to themselves, and have moral standards that put their interests before everyone else’s.
Under Reuben Mark’s direction, Colgate-Palmolive launched mobile dental vans designed to teach oral hygiene to children around the country. Mark enlisted the help of prominent figures, such as Olympian Jackie Joyner-Kersee and professional baseball player Gary Sheffield, who participated in the “100 Million Smiles”
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Exhibit 14.15 Ethical and Unethical Charismatics
CHARISMATIC LEADER BEHAVIORS
master manipulation was a scheme to loot Enron. He set up separate partnerships, secretly run by himself, to engage in deals with Enron. The deals quickly made tens of millions of dollars for Fastow—and prettified Enron’s financials in the short run by taking unwanted assets off its books. But they left Enron with time bombs that would ultimately cause the company’s total implosion—and lose shareholders billions. When Enron’s scandals were exposed, Fastow pleaded guilty to securities fraud and agreed to pay back nearly $24 million and serve 10 years in prison.”65 Exhibit 14.15 shows the stark differences between ethical and unethical charismatics on several leader behaviors: exercising power, creating the vision, communicating with followers, accepting feedback, stimulating followers intellectually, developing followers, and living by moral standards. For example, in terms of creating a vision, ethical charismatics include followers’ concerns and wishes by having them participate in the development of the company vision. By contrast, unethical charismatics develop a vision by themselves solely to meet their personal agendas. One unethical charismatic said, “The key thing is that it is my idea; and I am going to win with it at all costs.”66 So, what can companies do to reduce the risks associated with unethical charismatics?67 To start, they need a clearly written code of conduct that is fairly and consistently enforced for all managers. Next, companies should recruit, select, and promote managers with high ethical standards. Also, companies need to train leaders to value, seek, and use diverse points of view. Leaders and subordinates also need training regarding ethical leader behaviors so that abuses can be recognized and corrected. Finally, companies should
ETHICAL CHARISMATICS
UNETHICAL CHARISMATICS
Exercising power
Power is used to serve others.
Power is used to dominate or manipulate others for personal gain.
Creating the vision
Followers help develop the vision.
Vision comes solely from leader and serves his or her personal agenda.
Communicating with followers
Two-way communication: Seek out viewpoints on critical issues.
One-way communication: Not open to input and suggestions from others.
Accepting feedback
Open to feedback. Willing to learn from criticism.
Inflated ego thrives on attention and admiration of sycophants. Avoid or punish candid feedback.
Stimulating followers
Want followers to think and question status quo as well as leader’s views.
Don’t want followers to think. Want uncritical, intellectually unquestioning acceptance of leader’s ideas.
Developing followers
Focus on developing people with whom they interact. Express confidence in them and share recognition with others.
Insensitive and unresponsive to followers’ needs and aspirations.
Living by moral standards
Follow self-guided principles that may go against popular opinion. Have three virtues: courage, a sense of fairness or justice, and integrity.
Follow standards only if they satisfy immediate self-interests. Manipulate impressions so that others think they are “doing the right thing.” Use communication skills to manipulate others to support their personal agenda.
Source: J. M. Howell & B. J. Avolio, “The Ethics of Charismatic Leadership: Submission or Liberation?” Academy of Management Executive 6, no. 2 (1992): 43–54.
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celebrate and reward people who exhibit ethical behaviors, especially ethical leader behaviors.68
7.2 Transformational Leadership While charismatic leaders are able to articulate a clear vision, model values consistent with that vision, communicate high performance expectations, and establish very strong relationships with their followers, transformational leadership goes further by generating awareness and acceptance of a group’s purpose and mission and by getting employees to see beyond their own needs and self-interest for the good of the group.69 Like charismatic leaders, transformational leaders are visionary, but they transform their organizations by getting their followers to accomplish more than they intended and even more than they thought possible. Transformational leaders are able to make their followers feel that they are a vital part of the organization and help them see how their jobs fit with the organization’s vision. By linking individual and organizational interests, transformational leaders encourage followers to make sacrifices for the organization because they know that they will prosper when the organization prospers. As Exhibit 14.16 shows, transformational leadership has four components: charismatic leadership or idealized influence, inspirational motivation, intellectual stimulation, and individualized consideration.70 Charismatic leadership or idealized influence means that transformational leaders act as role models for their followers. Because transformational leaders put others’ needs ahead of their own and share risks with their followers, they are admired, respected, and trusted, and followers want to emulate them. Thus, in contrast to purely charismatic leaders (especially unethical charismatics), transformational leaders can be counted on to do the right thing and maintain high standards for ethical and personal conduct. For example, CEO Alan Lacy didn’t hesitate to fire two top managers when they misled him about the revenue and profit outlook for Sears’ credit business (i.e., credit cards and loans), which accounted for more than half of Sears’ profits. Lacy explained his actions, saying, “There’s a higher standard today. As a CEO, I’ve got to sign a certificate affirming that our financial reporting is not just in conformance with GAAP [Generally Accepted Accounting Principles] but that it fairly presents the business.”71 Inspirational motivation means that transformational leaders motivate and inspire followers by providing meaning and challenge to their work. By clearly communicating expectations and demonstrating commitment to goals, transformational leaders help followers envision future states, such as the organizational vision or mission. In turn, this leads to greater enthusiasm and optimism about the future. Medtronic’s mission is “To contribute to human welfare by application of biomedical engineering in the research, design, manufacture, and sale of instruments or appliances that alleviate pain, restore health, and extend life [emphasis added].”72 Because Medtronic designs and makes life-altering products, it has an opportunity to inspire the managers and workers who work there. Every December for the holiday party, Medtronic flies in six patients to demonstrate that the company is accomplishing its mission to “alleviate pain, restore health, and extend life.” The patients give testimonials describing the difference that Medtronic’s products have made to them and their loved ones. Production supervisor Karen McFadzen says, “We have patients who come in who would be dead if it wasn’t for us. I mean, they sit right up there and they tell us what their lives are like. You don’t walk away from them not feeling anything.” Fortune magazine described the annual event this way: “It’s a teary, communal reminder that what goes on here day after day is not the same as making VCRs.”73
transformational leadership Leadership that generates awareness and acceptance of a group’s purpose and mission and gets employees to see beyond their own needs and selfinterests for the good of the group.
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Intellectual stimulation means that transformational leaders encourage followers to be creative and innovative, to question assumptions, and to look at problems and situations in new ways, Idealized even if their ideas are different from the leader’s. CEO Anne MulcInfluence ahy encourages a questioning approach by regularly meeting with Xerox’s 500 top managers in groups of 80 managers at a time. Mulcahy says that the meetings, which last for several days, are Individualized Inspirational “designed to be critical,” to encourage honest, unfiltered discusConsideration Motivation sions, and to realistically face up to problems that need solving. She asks the managers to tell her what Xerox’s weaknesses are and what their major concerns are. In general says Mulcahy, “They worry about growth, and whether our strategy is sufficient to deIntellectual liver growth, especially with the economy we’re in.”74 In return, Stimulation Mulcahy uses these meetings to be brutally candid with her managers regarding their performance and where Xerox stands. Said one manager, “Part of her DNA is to tell you the good, the bad, and the ugly.”75 Exhibit 14.16 Components of Transformational Individualized consideration means that transformational leaders pay Leadership special attention to followers’ individual needs by creating learning opportunities, accepting and tolerating individual differences, encouraging two-way communication, and being good listeners. Roy Pelaez, who supervises 426 Aramark employees who clean airplanes, believes in attending to employees’ needs. He says, “Managers are not supposed to get involved with the personal problems of their employees, but I take the opposite view.”76 With morale low and turnover high, he hired a tutor to improve his employees’ English skills. To keep absences low, he found government programs that provided certified babysitters for his low-paid employees. And, he set up three computers so that employees could teach each other to use word processors and spreadsheets. Says Pelaez, “All of these things are important, because we want employees who really feel connected to the company.” Clearly, they do. Turnover, once almost 100 percent per year, dropped to 12 percent after Pelaez began paying attention to his employees’ needs. Finally, a distinction needs to be drawn between transformational leadership and transactional leadership. While transformational leaders use visionary and transactional leadership inspirational appeals to influence followers, transactional leadership is based on leadership based on an exchange an exchange process, in which followers are rewarded for good performance process, in which followers are reand punished for poor performance. When leaders administer rewards fairly warded for good performance and punand offer followers the rewards that they want, followers will often reciprocate ished for poor performance. with effort. A problem, however, is that transactional leaders often rely too heavily on discipline or threats to bring performance up to standards. Though this may work in the short run, it’s much less effective in the long run. Also, as discussed in Chapters 11 and 13, many leaders and organizations have difficulty successfully linking pay practices to individual performance. As a result, studies consistently show that transformational leadership is much more effective on average than transactional leadership. In the United States, Canada, Japan, and India, and at all organizational levels, from first-level supervisors to upper-level executives, followers view transformational leaders as much better leaders and are much more satisfied when working for them. Furthermore, companies with transformational leaders have significantly better financial performance.77
Review 7: Visionary Leadership Strategic leadership requires visionary, charismatic, and transformational leadership. Visionary leadership creates a positive image of the future that motivates organizational members and provides direction for future planning and goal setting. Charismatic leaders have strong, confident, dynamic personalities that
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attract followers, enable the leader to create strong bonds, and inspire followers to accomplish the leader’s vision. Followers of ethical charismatic leaders work harder, are more committed and satisfied, are better performers, and are more likely to trust their leaders. Followers can be just as supportive and committed to unethical charismatics, but these leaders can pose a tremendous risk for companies. Unethical charismatics control and manipulate followers and do what is best for themselves instead of their organizations. To reduce the risks associated with unethical charismatics, companies need to enforce a clearly written code of conduct; recruit, select, and promote managers with high ethical standards; train leaders to value, seek, and use diverse points of view; teach everyone in the company to recognize unethical leader behaviors; and celebrate and reward people who exhibit ethical behaviors. Transformational leadership goes beyond charismatic leadership by generating awareness and acceptance of a group’s purpose and mission and by getting employees to see beyond their own needs and self-interest for the good of the group. The four components of transformational leadership are charisma or idealized influence, inspirational motivation, intellectual stimulation, and individualized consideration.
Key Terms achievement-oriented leadership, 465
charismatic leadership, 475 consideration, 457 contingency theory, 460 directive leadership, 464 ethical charismatics, 475 initiating structure, 457 leader-member relations, 461 leadership, 450
leadership neutralizers, 452 leadership style, 459 leadership substitutes, 452 normative decision theory, 469 participative leadership, 465 path-goal theory, 463 position power, 461 situational favorableness, 461 situational theory, 467 strategic leadership, 473
supportive leadership, 464 task structure, 461 traits, 454 trait theory, 454 transactional leadership, 478 transformational leadership, 477 unethical charismatics, 475 visionary leadership, 474 worker readiness, 467
Concept Check 1. What are the differences between leaders and managers? 2. Do leaders always matter? Explain your answer in terms of substitutes and neutralizers. 3. How does the Blake-Mouton leadership grid depict leaders based on the leadership behaviors of initiating structure and consideration? 4. Explain how Fiedler’s contingency theory works. 5. Describe the implications of situational favorableness.
6. What is path-goal theory? 7. Identify the four leadership styles of path-goal theory and explain when they are most appropriately used. 8. What is Situational Leadership theory? 9. Explain normative decision theory (the VroomYetton-Jago Model). 10. What is the difference between transformational leadership and transactional leadership?
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Self-Assessment LEADERSHIP ORIENTATION Think of everyone you have ever worked with in jobs, clubs, volunteer positions, student projects—everything. Now that you have all those situations in mind, try to identify the one person with whom you least liked to work. Who was the most difficult person to work with to get a job done? For whatever reason, you had
trouble working with this person. The person can be a peer, boss, or subordinate. When you have the person in mind, turn to page 622 of the Self-Assessment Appendix to complete Fiedler’s Least Preferred Coworker scale and gain some insights into your leadership orientation.
Management Decision UNIQUE LEADERSHIP DECISION In an industry not known for generous benefits, you have long stood out.78 As the president and owner of Unique Restaurant Corporation, you have become Detroit’s peerless culinary celebrity in part by attracting the best managers, waiters, busboys, and bartenders to work for you. The company, with $40 million in annual revenue, attracts such talent by providing excellent benefits. For example, you began providing health insurance 17 years ago, making the plan available not only to all full-timers, including hourly staff, but also to part-timers who had been with the company for three years and worked three shifts a week. But with the auto industry slumping and health-care costs soaring, you have recently found yourself considering the once unthinkable: dropping employee health-care coverage. Unique’s plan was a so-called self-insurance package run by the baby food maker Gerber. For a few dollars per employee per month, you could tap into a health maintenance organization or preferred provider organization on Gerber’s network. The costs were reasonable. If an employee had a baby and the hospital bill came to $8,000, Unique paid about $3,000. As the company grew, however, so did the buffet of benefits it offered. First, you added dental coverage. Next came a prescription drug plan that covered the full cost of medications. Then, a few years ago Unique began to pay a portion of its employees’ child-care costs. And these programs were on top of paid vacations and the company’s 401(k) plan! For a long time, everyone was happy. But when Detroit’s economy began to sputter, people cut back on entertaining, both lavish catered events and casual dining out. Even as sales receipts shrank (sometimes close
to 15 percent below previous years), Unique’s medical expenses were climbing 10 to 15 percent a year, and the prescription drug plan alone jumped from $3,000 a month to $9,000. The employee loyalty you had worked so hard to inspire was soon a double-edged sword, ultimately slicing into your bottom line. When you began offering medical coverage, your workers were generally young, healthy, and cheap to insure. After more than two decades in business, however, many of Unique’s employees have grown up with the company—and so have their medical expenses. And then there is the sheer size of Unique’s work force: 800 people. After six months of ignoring the problem, you finally realize you need to act. You’ve got three options, none of them particularly savory. First, you could eliminate all health benefits. The idea is repellent, but you’ve got to admit that many of your competitors don’t offer health insurance, especially to hourly staff. Or you could try to find a cheaper plan that would cover less, perhaps only providing emergency insurance. Finally, you could pass along the rising cost to your employees, who might not be able to afford it. You’re not sure how your staff will react, and they’re really the secret ingredient that makes your company work. Questions 1. Can you retain your leadership style and still make the tough decision the company needs? 2. How involved should your employees be in making the decision? (Hint: Consider using the decision tree in Exhibit 14.14 to determine the appropriate level of employee participation in this decision.) 3. What do you do to manage the soaring health-care costs that are crippling your business?
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Management Team Decision TRANSITION AT HABITAT FOR HUMANITY With 500 full-time employees, roughly 500,000 unpaid volunteers, 2,303 affiliates worldwide, and upwards of $160 million in annual donations, Habitat for Humanity International (HFHI) is the nineteenth largest nonprofit organization in the United States.79 Since it was founded in 1976 by Millard and Linda Fuller, HFHI has built some 175,000 houses around the world, 20,000 of them in 2004 alone. Clearly, what started as a straightforward, eucumenical Christian ministry has grown into a global force for housing the poor and one of the world’s most reknowned nonprofit organizations. And that success is due in large part to the efforts of Millard Fuller, an avid fund-raiser, prolific author (he has written nine books), sought-after public speaker, and an all-around passionate spokesperson for the cause. When Fuller’s tenure as president was set to end after 28 years at the helm of HFHI, he and the board of directors had serious disagreements about the transition of leadership. Fuller feared that the board was moving toward a culture of “bean-counting” and away from a strong Christian commitment. He charged that many board members were not spiritually grounded. The board defended its Christian focus, but recognized that the organization’s mission had become much larger than the influence of a single individual. After 11 months of wrangling, Fuller, who was approaching 70 years of age, agreed to step down as CEO and hire an interim CEO. Fuller took a new position with the title Founder/President and became the chief spokesperson for Habitat. Taking the CEO position was Paul Leonard, who couldn’t have been more different from his predecessor. Leonard, a retired real estate and constuction industry executive, had expertise in organizational development and a deep knowledge of the construction industry. He accepted the position and with it responsibility for the overall management of HFHI for a period of two years. Only three months after naming Leonard as CEO, however, the HFHI board of directors fired Fuller
altogether for a pattern of “divisive and disruptive” public comments and went so far as to lock him out of the HFHI building. In the face of soaring land costs and growing housing regulations, Leonard will have to contend with a changing external environment that requires more careful planning. At the same time, HFHI’s five-year plan calls for the organization to seek exponential annual growth, rather than the 5 to 10 percent annual growth it has been experiencing in recent years. As a member of the board, you face significant challenges as well. Even though Leonard was a solid choice for interim CEO, the board is conducting an executive search to fill the permanent position. Should the permanent CEO be more like Fuller, a passionate and charismatic evangelist not afraid of setting tremendous stretch goals (like eradicating substandard housing in 20 years), or like Leonard, a methodical executive who can manage and grow Habitat’s sprawling, decentralized organization? Or should the permanent CEO fit an altogether different profile? Assemble a team of four to five students to act as the board of directors of Habitat for Humanity International. As a group, discuss each of the following questions to identify the chief characteristics the new CEO of HFHI will need to possess. Questions 1. Does Habitat for Humanity need a leader or a seasoned manager? In other words, do you look to fill the CEO position with a visionary leader (like Fuller) or a seasoned manager (like Leonard) whose strengths lie more in organizational development than charismatic passion? 2. The new CEO will need to work with both the employees of HFHI and its hundreds of thousands of volunteers and donors. What leadership style will you look for in prospective candidates to meet the needs of those two consituencies?
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Develop Your Career Potential LEADERSHIP REVISITED You can learn a lot about leadership traits, behaviors, and styles by reading books, but until you're actually in charge, you won't be able to test those ideas for yourself. Likewise, you can learn a tremendous amount about leadership by studying and observing the people who lead you. Until you are actually in the position of leading, however, you won't know if their leadership practices and styles will work for you. In short, when learning about leadership, there is no substitute for leadership experience. Fortunately, many people are leaders, even if they don't have the title. Many people have younger brothers or sisters, friends, or family members who look up to them and follow their lead. Many employees are respected for their wisdom, knowledge, and ability to solve difficult problems, even though they are not the formal supervisor. You may be able to think of a time when you have assumed the role of leader in a job, at school, or possibly as a member of an extracurricular club, fraternity, sorority, or social organization. As you remember that leadership experience, try to determine what type of a leader you were. Think about how you helped solve problems or worked to inspire and motivate those around you. Were you more of a leader or a manager? Did you consistently apply the same leadership style with all people and in all situations, or did you change leadership styles to fit a specific problem or situation? Did your leadership style work? Was it accepted by those around you? What was the context of the situation or job? Were the individuals self-motivated and self-directed, or did you have to provide direction and assistance every step of the way? As you think back on this experience, consider using the Internet resources listed below to deepen your understanding of your own leadership style and potential. Then answer the questions that follow.
Internet Resources You can learn more about your personal leadership style by visiting some or all of the following Web sites: • http://www.nsba.org/sbot/toolkit/LeadSA.html This is a good Web site illustrating qualities of effective leaders. • http://www.trans-act.com/forms/leadership.htm This site offers a quick quiz to determine your individual propensity to lead.
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http://www.emode.com/emode/tests/leader.jsp At this site, you can take a 17-question quiz that ranks your ability to lead. http://www.stevesullivan.com This site features a 10-question test that determines your knowledge about leadership and provides review material to increase your awareness regarding leadership theories and applications.
To learn more about leadership and to see current articles discussing leadership theories and techniques, visit some or all of the following Web sites: • http://www.nwlink.com/~donclark/leader/leader.html Big Dog's Leadership page provides a basic background on leadership designed for new supervisors and managers. • http://www.articles911.com The leadership category at this site contains free articles on leadership development, improvement, practices, and assessment styles. • http://www.personal-development.com/articles.htm This Web site contains many free articles aimed at developing an individual's leadership style, teaching time management techniques, increasing self-esteem, overcoming public speaking anxiety, and much more. Questions After reviewing some of the informative Web sites listed above, use your knowledge of leadership, your personal leadership style, and information gleaned from previous experiences to answer the following questions: 1. Describe a situation in which you became a leader or assumed a leadership role. 2. What surprises did you discover when assuming this role? 3. Did you initially fear any aspect of being a leader that turned out to be much easier than you expected? If so, describe your experience. 4. What was the most difficult thing about being a leader? 5. After reading this chapter on leadership, what information could you use that would make you a better leader today than you were back then?
Take Two
BIZ FLIX U-571
This action-packed thriller deals with a U.S. submarine crew’s efforts to retrieve an Enigma encryption device from a disabled German submarine during World War II. After the crew gets the device, the U.S. submarine sinks, and they must use the German submarine to escape from enemy destroyers. The film’s nonstop action and extraordinary special effects powerfully illustrate the challenges facing the leadership on board the submarine. This scene is an edited composite of scenes that apperar early in the film. The S33, an older U.S. submarine, is embarking on a secret mission. Before departure, the S33’s officers receive a briefing on their mission from Office of Naval Intelligence representatives on board. Executive officer Lt. Andrew Tyler (Matthew McConaughey) reports on the submarine’s status to Lt. Commander Mike Dahlgren (Bill Paxton). The film continues with the S33 finding the disabled German submarine. What to Watch for and Ask Yourself 1. What aspects of leadership does Dahlgren say are important for a submarine commander? 2. Which leadership behaviors or traits does he emphasize? 3. Are these traits or behaviors right for this situation? Why or why not?
Management Workplace Auntie Anne’s Pretzels
In 1987, Anne Beiler managed a small pretzel and pizza concession at the Lancaster County (Pennsylvania) Farmer’s Market. She eventually convinced her manager to focus only on selling pretzels, and under Anne’s leadership, the stand became a business with 850 locations and $232 million in annual revenue in less than 15 years. In today’s business environment, the formula for Anne’s success is as important as the secret ingredients in her pretzels. What to Watch For and Ask Yourself 1. How does Anne Beiler exhibit the behaviors of a successful leader? 2. What evidence do you see in the segment that Anne Beiler uses multiple situational approaches to leadership? 3. What makes Anne Beiler a visionary leader?
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Managing Communication
C H A P T E R
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Chapter15 What Would You Do? What Is Communication? 1. Perception and Communication Problems 1.1 1.2 1.3 1.4
Basic Perception Process Perception Problems Perceptions of Others Self-Perception
2. Kinds of Communication 2.1 The Communication Process 2.2 Formal Communication Channels 2.3 Informal Communication Channels 2.4 Coaching and Counseling: Oneon-One Communication 2.5 Nonverbal Communication
How to Improve Communication 3. Managing One-on-One Communication 3.1 Choosing the Right Communication Medium 3.2 Listening
3.3 Giving Feedback 3.4 Improving Cross-Cultural Communication
4. Managing Organization-Wide Communication 4.1 Improving Transmission: Getting the Message Out 4.2 Improving Reception: Hearing What Others Feel and Think
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise Xtra! Eight exhibit worksheets, author FAQs, quiz, Management News, and the video clips from the chapter with exercises Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
JetBlue Headquarters, Forest Hills, New York.1 Since airline deregulation nearly 30 years ago, more than 100 new airlines have been launched, but only two, AirTran and America West, have survived in the long term. Now JetBlue stands a chance to be the third if it can continue to prosper over the next five years. JetBlue, which started flying out of New York City’s Kennedy Airport in February 2000, offers direct flights (no hub and spoke system like the major carriers), low fares, wide leather seats, a flat-screen TV with 36 live digital satellite channels for every passenger, one-way tickets (if you want a round trip, buy two), no requirement for Saturday night stayovers to get cheap fares, and great customer service. To keep costs low, CEO David Neeleman modeled JetBlue after Southwest Airlines (Neeleman founded Morris Air, which was purchased by Southwest in the mid-1990s). Thus, JetBlue flies just one type of airplane (the Airbus A 320), which means that pilots, flight attendants, and mechanics have to be trained and Federal Aviation Administration (FAA) certified on only one kind of plane. It also flies in and out of smaller airports, like Long Beach (22 miles south of Los Angeles International), Ontario (35 miles east of downtown Los Angeles), and Fort Lauderdale (instead of busy Miami International). Not only are the landing fees that airports charge airlines cheaper at smaller airports, but, more importantly, there is also less plane traffic, so it is easier to “turn” flights— meaning emptying the planes of arriving passengers, filling them with departing passengers, and getting them back on the runway and into the air as quickly as possible. Since planes make money only when they’re in the air, the ability to turn flights quickly is critical. For now, at 6.4 cents per passenger mile, JetBlue has the lowest costs in the industry, even better than Southwest’s. But part of those low costs derives from its new planes, which don’t need expensive maintenance yet, and its nonunionized work force. In its financial statements, the company warns investors that its maintenance costs “will increase significantly” as its planes age. And, to keep its pilots, flight attendants, and mechanics happy, at the company, and nonunionized, JetBlue will have to
What Would You Do?
pay them significantly more money (JetBlue’s wages are much lower than those at established airlines). Another potential problem is the company’s plan to grow to 290 planes and 25,000 employees within five years from its current level of 73 planes and 6,500 employees! By contrast, it took Southwest 27 years, more than five times as long, to profitably grow to 280 aircraft. Hyper growth like this is likely to create a number of serious issues, not the least of which will be maintaining JetBlue’s innovative, service-oriented culture. (Treat your people right. Communicate with your team. Inspire greatness in 0thers. Encourage initiative and innovation. Do the right thing.) With the addition of nearly 20,000 new employees in five years, how can JetBlue’s managers continue to communicate and strengthen its culture? How can they keep getting the message out about what makes JetBlue unique? Likewise, a fourfold increase in employees and planes is going to lead to astronomical growth in JetBlue’s customer base. As a small airline, JetBlue has a reputation for listening to its customers (and employees). STUDY TIP But with four to six times as Close your book and write a many customers, how will list of the key concepts in this JetBlue continue to monitor, chapter. Or create flashcards meet, and satisfy its customers’ (and employees’) needs? for key concepts (concept on Finally, as a startup company, one side, explanation and JetBlue’s top managers have example on the other). close relationships with most Flashcards are great portable employees. After all, they study aids that you can use worked together to make the company a success. But how over and over, in a group, with can JetBlue’s top managers a partner, or on your own. maintain close ties with its workers as the company grows into a much larger major airline? If you were in charge at JetBlue, what would you do?
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It’s estimated that managers spend over 80 percent of their day communicating with others.2 Indeed, much of the basic management process—planning, organizing, leading and controlling—cannot be performed without effective communication. If this weren’t reason enough to study communication, consider that effective oral communication, such as listening, following instructions, conversing, and giving feedback, is the most important skill for college graduates who are entering the work force.3 Furthermore, across all industries, poor communication skills rank as the single most important reason that people do not advance in their careers.4 Finally, communication is especially important for top managers like JetBlue’s CEO. As Mark DeMichele, president of Arizona Public Service Company put it, “Communication is the key to success. CEOs can have good ideas, a vision, and a plan. But they also have to be able to communicate those plans to people who work for them.”5 This chapter begins by examining the role of perception in communication and how perception can make it difficult for managers to achieve effective communication. Next, you’ll read about the communication process and the various kinds of communication found in most organizations. In the last half of the chapter, the focus is on improving communication in organizations. You’ll learn about one-on-one communication and then about how to communicate and listen to others effectively organization-wide.
What Is Communication?
communication The process of transmitting information from one person or place to another.
Whenever Kristy Keith’s boss would say, “Today is a good day for change,” she knew that bad news, such as layoffs or a lost client, was sure to follow. Keith says, “It was comforting to some people who didn’t know better,” but the experienced employees went “back to their offices and huddled” to discuss what her boss’s announcement really meant (and it usually wasn’t good).6 Many bosses try to make bad news sound good with phrases like “rightsizing” for layoffs, “merger of equals” for another company has acquired ours, “pursuing other interests” for employees who were fired, and “cost efficiencies” for your job is being outsourced to India. Why do managers sugarcoat bad news when communicating? Because, says management professor Paul Argenti, they think, “they’ll get less flak.” Communication is the process of transmitting information from one person or place to another. While some bosses sugarcoat bad news, smart managers understand that in the end effective, straightforward communication between managers and employees is essential for success.
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After reading the next two sections, you should be able to explain the role that perception plays in communication and communication problems. describe the communication process and the various kinds of communication in organizations.
PERCEPTION AND COMMUNICATION PROBLEMS
One study found that when employees were asked whether their supervisor gave recognition for good work, only 13 percent said their supervisor gave a pat on the back, and a mere 14 percent said their supervisor gave sincere and thorough praise. But, when the supervisors of these employees were asked if they gave recognition for good work, 82 percent said they gave pats on the back, while 80 percent said that they gave sincere and thorough praise.7 Given that these managers and employees worked closely together, how could they have had such different perceptions of something as simple as praise?
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Let’s learn more about perception and communication problems by examining 1.1 the basic perception process, 1.2 perception problems, 1.3 how we perceive others, and 1.4 how we perceive ourselves. We’ll also consider how all of these factors make it difficult for managers to achieve effective communication.
1.1 Basic Perception Process
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Stimulus
Perceptual
Stimulus
Attention
Stimulus
Filter
As shown in Exhibit 15.1, perception is the process by which individuals attend to, organize, interpret, and retain information from their environments. And since communication is the process Perceptual Organization Filter of transmitting information from one person or place to another, perception is obviously a key part of communication. Yet, perception can also be a key obstacle to communication. As people perform their jobs, they are exposed to a wide variety of informational stimuli, such as emails, direct conversations with Perceptual Interpretation Filter the boss or coworkers, rumors heard over lunch, stories about the company in the press, or a video broadcast of a speech from the CEO to all employees. Just being exposed to an informational stimulus, however, is no guarantee that an individual will pay attenPerceptual Retention Filter tion or attend to that stimulus. People experience stimuli through their own perceptual filters—the personality-, psychology-, or experience-based differences that influence them to ignore or pay attention to particular stimuli. Because of filtering, people exposed to the Perception same information will often disagree about what they saw or heard. For example, every major stadium in the National Football League has a huge Exhibit 15.1 TV monitor on which fans can watch replays. As the slow motion video is re- Basic Perception Process played on the monitor, you can often hear cheers and boos, as fans of both teams perceive the same replay in completely different ways. This happens perception The process by which individuals because the fans’ perceptual filters predispose them to attend to stimuli that attend to, organize, interpret, and support their team and not their opponents. retain information from their And the same perceptual filters that affect whether we believe our favorite environments. team was “robbed” by the referees also affect communication, that is, the perceptual filters transmitting of information from one person or place to another. As shown in The personality-, psychology-, or Exhibit 15.1, perceptual filters affect each part of the perception process: experience-based differences that influence people to ignore or pay attention, organization, interpretation, and retention. Attention is the process of noticing or becoming aware of particular stimuli. attention to particular stimuli. Because of perceptual filters, we attend to some stimuli and not others. Organization is the process of incorporating new information (from the stimuli that you notice) into your existing knowledge. Because of perceptual filters, we are more likely to incorporate new knowledge that is consistent with what we already know or believe. Interpretation is the process of attaching meaning to new knowledge. Because of perceptual filters, our preferences and beliefs strongly influence the meaning we attach to new information (e.g., “This must mean that top management supports our project.”). Finally, retention is the process of remembering interpreted information. In other words, retention is what we recall and commit to memory after we have perceived something. Of course, perceptual filters also affect retention, that is, what we’re likely to remember in the end. For instance, imagine that you miss the first 10 minutes of a TV show and turn on your TV to see two people talking to each other in a living room. As they talk, they walk around the room, picking up and putting down various items; some items, such as a ring, watch, and credit card, appear to be valuable, and others appear to be drug related, such as a water pipe for smoking marijuana. In fact, this situation was depicted on videotape in a well-known study that manipulated people’s perceptual filters.8 One-third of the study participants were told that the people were there to rob the apartment. Another
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third of the participants were told that police were on their way to conduct a drug raid and that the people in the apartment were getting rid of incriminating evidence. The remaining third of the participants were told that the people were simply waiting for a friend. After watching the video, participants were asked to list all of the objects from the video that they could remember. Not surprisingly, the different perceptual filters (theft, drug raid, and waiting for a friend) affected what the participants attended to, how they organized the information, how they interpreted it, and ultimately which objects they remembered. Participants who thought a theft was in progress were more likely to remember the valuable objects in the video. Those who thought a drug raid was imminent were more likely to remember the drug-related objects. There was no discernible pattern to the items remembered by those who thought that the people in the video were simply waiting for a friend. In short, because of perception and perceptual filters, people are likely to pay attention to different things, organize and interpret what they pay attention to differently, and, finally, remember things differently. Consequently, even when people are exposed to the same communications (e.g., organizational memos, discussions with managers or customers), they can end up with very different perceptions and understandings. This is why communication can be so difficult and frustrating for managers. Let’s review some of the communication problems created by perception and perceptual filters.
1.2 Perception Problems
selective perception The tendency to notice and accept objects and information consistent with our values, beliefs, and expectations, while ignoring or screening out or not accepting inconsistent information.
closure The tendency to fill in gaps of missing information by assuming that what we don’t know is consistent with what we already know.
Perception creates communication problems for organizations because people exposed to the same communication and information can end up with completely different ideas and understandings. Two of the most common perception problems in organizations are selective perception and closure. At work, we are constantly bombarded with sensory stimuli—phones ringing, people talking in the background, computers dinging as new email arrives, people calling our names, and so forth. As limited processors of information, we cannot possibly notice, receive, and interpret all of this information. As a result, we attend to and accept some stimuli but screen out and reject others. This isn’t a random process, however. Selective perception is the tendency to notice and accept objects and information consistent with our values, beliefs, and expectations, while ignoring or screening out inconsistent information. For example, when Jack Smith, the CEO of General Motors, was a junior level executive, he traveled to Japan to learn why Toyota’s cars were so reliable and why Toyota was so productive. When he learned that Toyota could build a car with half as many people as GM, he wrote a report and shared his findings with GM’s allpowerful executive committee. But no one on the committee believed what he told them. The executives just couldn’t accept that a Japanese company was so much more effective than GM. Says Smith, “Never in my life have I been so quickly and unceremoniously blown out of the water.”9 Once we have initial information about a person, event, or process, closure is the tendency to fill in the gaps where information is missing, that is, to assume that what we don’t know is consistent with what we already know. If employees are told that budgets must be cut by 10 percent, they may automatically assume that 10 percent of employees will lose their jobs, too, even if that isn’t the case. Not surprisingly, when closure occurs, people sometimes “fill in the gaps” with inaccurate information, and this can create problems for organizations. For example, one of the first decisions faced by a new CEO was whether to approve a marketing campaign to launch a new product. Promotional materials, advertising, and a sales and distribution plan had all been completed. The only thing missing was the CEO’s approval. Though he liked the campaign, he
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wanted to send a strong message that the company needed to change. So he killed the campaign, which demoralized the marketing manager and team that had spent a year developing it. Because they didn’t know why the CEO canceled the marketing campaign, his top managers assumed (i.e., closure) that the CEO didn’t have confidence in any of them either. Fearing that their decisions would be overturned, too, they began seeking the CEO’s approval on everything from capital expenditures to personnel decisions to lower-level issues such as where, when, and whether to hold a conference for customers. After the marketing manager quit to take a job at another company, the CEO called his top managers together, assured them they had his confidence, told them he probably should have approved the marketing campaign, and said that he wouldn’t repeat his mistake by doing anything to undermine their confidence or their authority.10
1.3 Perceptions of Others Attribution theory says that we all have a basic need to understand and explain
attribution theory
the causes of other people’s behavior.11 In other words, we need to know why people do what they do. According to attribution theory, we use two general reasons or attributions to explain people’s behavior: an internal attribution, in which behavior is thought to be voluntary or under the control of the individual, and an external attribution, in which behavior is thought to be involuntary and outside of the control of the individual. For example, have you ever seen someone changing a flat tire on the side of the road and thought to yourself, “What rotten luck—somebody’s having a bad day”? If you did, you perceived the person through an external attribution known as the defensive bias. The defensive bias is the tendency for people to perceive themselves as personally and situationally similar to someone who is having difficulty or trouble.12 And, when we identify with the person in a situation, we tend to use external attributions (i.e., the situation) to explain the person’s behavior. For instance, since flat tires are common, it’s easy to perceive ourselves in that same situation and put the blame on external causes, such as running over a nail. Now, let’s assume a different situation, this time in the workplace:
A theory that states that we all have a basic need to understand and explain the causes of other people’s behavior.
defensive bias The tendency for people to perceive themselves as personally and situationally similar to someone who is having difficulty or trouble.
A utility company worker puts a ladder on a utility pole and then climbs up to do his work. As he’s doing his work, he falls from the ladder and seriously injures himself.13 Answer this question: Who or what caused the accident? If you thought, “It’s not the worker’s fault. Anybody could fall from a tall ladder,” then you’re still operating from a defensive bias in which you see yourself as personally and situationally similar to someone who is having difficulty or trouble. In other words, you made an external attribution by attributing the accident to an external cause, meaning the situation. In reality, however, most accident investigations initially blame the worker (i.e., an internal attribution) and not the situation (i.e., an external attribution). Typically, 60 to 80 percent of workplace accidents each year are blamed on “operator error,” that is, the employees themselves. More complete investigations, however, usually show that workers are responsible for only 30 to 40 percent of all workplace accidents.14 Why are accident investigators so quick to blame workers? The reason is that they are committing the fundamental attribution error, which is the tendency to ignore external causes of behavior and to attribute other people’s actions to internal causes.15 In other words, when investigators examine the possible causes of an accident, they’re much more likely to assume that the accident is a function of the person and not the situation. Which attribution, the defensive bias or the fundamental attribution error, are workers likely to make when something goes wrong? In general, as shown in Exhibit 15.2, employees and coworkers are more likely to perceive events and explain behavior from a defensive bias. Because they do the work themselves and
fundamental attribution error The tendency to ignore external causes of behavior and to attribute other people’s actions to internal causes.
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The Co worker
The Employee That’s the third sale I’ve lost this week because company management doesn't keep enough inventory in stock. I can't sell it if we don't have it.
How can they expect us to make sales if they don’t have hot-selling inventory in stock? We can’t sell what’s not there.
Defensive Bias–
Defensive Bias–
the tendency for people to perceive themselves as personally and situationally similar to someone who is having difficulty or trouble
the tendency for people to perceive themselves as personally and situationally similar to someone who is having difficulty or trouble
Exhibit 15.2 Defensive Bias and Fundamental Attribution Error
The Boss That new employee isn’t very good. I may have to get rid of him if his sales don’t improve.
Fundamental Attribution Error– the tendency to ignore external causes of behavior and to attribute other people’s actions to internal causes
see themselves as similar to others who make mistakes, have accidents, or are otherwise held responsible for things that go wrong at work, employees and coworkers are likely to attribute problems to external causes, such as failed machinery, poor support, or inadequate training. By contrast, because they are typically observers (who don’t do the work themselves) and see themselves as situationally and personally different from workers, managers (i.e., the boss) tend to commit the fundamental attribution error and blame mistakes, accidents, and other things that go wrong on workers (i.e., an internal attribution). Consequently, in most workplaces, when things go wrong, workers and managers can be expected to take opposite views. Therefore, together, the defensive bias, which is typically used by workers, and the fundamental attribution error, which is typically made by managers, present a significant challenge to effective communication and understanding in organizations.
1.4 Self-Perception
self-serving bias The tendency to overestimate our value by attributing successes to ourselves (internal causes) and attributing failures to others or the environment (external causes).
A manager at ExxonMobil Corporation decided that he wanted to find a way to help his poor-performing employees improve their performance. So he sat down with each of them and, in a positive, nonconfrontational way, explained, “I’m here to help you improve.” Most of his employees took his offer in the spirit intended and accepted his help. However, one employee burst into tears because no one had ever told her that her performance needed improvement. In fact, her hour-long outburst was so emotional that her manager decided that he would never “criticize” her again.16 The self-serving bias is the tendency to overestimate our value by attributing successes to ourselves (internal causes) and attributing failures to others or the environment (external causes).17 As the example with the upset ExxonMobil employee illustrates, the self-serving bias can make it especially difficult for managers to talk to employees about performance problems. In general, people have a need to maintain a positive self-image. This need is so strong that when people seek feedback at work, they typically want verification of their worth (rather than information about performance deficiencies) or assurance that mistakes or problems weren’t their fault.18 And, when managerial communication threatens people’s positive self-image, they can become defensive and emotional. They quit listening, and communication becomes ineffective. In the
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second half of the chapter, which focuses on improving communication, we’ll explain ways in which managers can minimize this self-serving bias and improve effective one-on-one communication with employees.
Review 1: Perception and Communication Problems Perception is the process by which people attend to, organize, interpret, and retain information from their environments. Perception is not a straightforward process, however. Because of perceptual filters, such as selective perception and closure, people exposed to the same information stimuli often end up with very different perceptions and understandings. Perception-based differences can also lead to differences in the attributions (internal or external) that managers and workers make when explaining workplace behavior. In general, workers are more likely to explain behavior from a defensive bias, in which they attribute problems to external causes (i.e., the situation). Managers, on the other hand, tend to commit the fundamental attribution error, attributing problems to internal causes (i.e., the worker associated with a mistake or error). Consequently, when things go wrong, it’s common for managers to blame workers and for workers to blame the situation or context in which they do their jobs. Finally, this problem is compounded by a self-serving bias that leads people to attribute successes to internal causes and failures to external causes. So, when workers receive negative feedback from managers, they may become defensive and emotional and not hear what their managers have to say. In short, perceptions and attributions represent a significant challenge to effective communication and understanding in organizations. 2
KINDS OF COMMUNICATION
Each year, on the anniversary of your hiring date, you receive a written assessment of your performance from your boss. This year, after receiving your performance appraisal, you gripe about it to your best friend, a coworker in a cubicle down the hall. Despite your griping, however, you appreciate that your boss cut you some slack, allowing you extra days off when you went through a divorce earlier this year. How did your boss know you were having personal problems? He knew something was wrong from your nonverbal communication—your rounded shoulders, the bags under your eyes, and your overall lack of energy. There are many kinds of communication—formal, informal, coaching/counseling, and nonverbal—but they all follow the same fundamental process. Let’s learn more about the different kinds of communication by examining 2.1 the communication process, 2.2 formal communication channels, 2.3 informal communication channels, 2.4 coaching and counseling, or one-on-one communication, and 2.5 nonverbal communication.
2.1 The Communication Process Earlier in the chapter, we defined communication as the process of transmitting information from one person or place to another. Exhibit 15.3 displays a model of the communication process and its major components: the sender (message to be conveyed, encoding the message, transmitting the message); the receiver (receiving message, decoding message, and the message that was understood); and noise, which interferes with the communication process. The communication process begins when a sender thinks of a message he or she wants to convey to another person. For example, a few years ago, the CEO of a phone company turned a corner near his house, saw a pay phone booth sitting there, and thought, “That’s an odd location for a phone booth. I wonder how much money it earns us.”19 The next step is to encode the message. Encoding means putting a message into a written, verbal, or symbolic form that can be recognized and understood by the receiver. The sender then transmits the message via communication channels. In the case of the CEO and the phone
encoding Putting a message into a written, verbal, or symbolic form that can be recognized and understood by the receiver.
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booth, the CEO ran into a midlevel employee the next day and said, “I’m curious. How much do we make on that phone booth near Message to Message that be conveyed my house? It’s not a big deal. Don’t spend a was understood lot of time on it. Just send me a note.”20 With some communication channels such as the telephone and face-to-face communication, the sender receives immediate feedback, Encode Decode whereas with others such as email (text mesmessage message sages and file attachments), fax, beepers, voice mail, memos, and letters, the sender must wait for the receiver to respond. NOISE NOISE NOISE Unfortunately, because of technical difficulties (e.g., fax down, dead battery on the mobile Transmit Receive message phone, inability to read email attachments) or message Communication channel people-based transmission problems (e.g., forgetting to pass on the message), messages aren’t Exhibit 15.3 always transmitted. If the message is transmitThe Interpersonal Communication ted and received, however, the next step is for the receiver to decode it. Decoding Process is the process by which the receiver translates the written, verbal, or symbolic decoding form of the message into an understood message. However, the message, as unThe process by which the receiver derstood by the receiver, isn’t always the same message that was intended by the translates the written, verbal, or symbolic form of a message into an sender. Because of different experiences or perceptual filters, receivers may attach understood message. a completely different meaning to a message than was intended. With respect to the phone booth, the midlevel employee was writing that quick note that the CEO wanted when his manager walked up and asked, “What are you doing?” The employee explained, “Oh, this is for the CEO. He stopped by and wanted to know how much we make on that phone booth near his house.” At this point the manager said—and this is where the message is improperly decoded—“You can’t send him a little note. There’s no comparison between that phone booth and other booths in the area.” The last step of the communication process occurs when the receiver gives feedback to sender the sender feedback. Feedback to sender is a return message to the sender that In the communication process, a indicates the receiver’s understanding of the message (of what the receiver was return message to the sender supposed to know, to do, or to not do). Feedback makes senders aware of that indicates the receiver’s possible miscommunications and enables them to continue communicating until understanding of the message. the receiver understands the intended message. Unfortunately, feedback doesn’t always occur in the communication process. In the case of the CEO and the phone booth, two months after his inquiry about the phone booth near his house, the midlevel employee to whom he posed the question and that employee’s executive vice president walked into his office. When they presented the CEO with a three ring binder containing a report and detailed analysis and charts regarding the phone booth near his house, he looked at them and said, “I have no idea what you’re talking about.”21 Complacency and overconfidence about the ease and simplicity of communication can lead senders and receivers to simply assume that they share a common understanding of the message and to not use feedback to improve the effectiveness of their communication. This is a serious mistake, especially since messages and feedback are always transmitted with and against a background noise of noise. Noise is anything that interferes with the transmission of the intended Anything that interferes with the message. Noise can occur in any of the following situations: Sender
Feedback to Sender
transmission of the intended message.
1. 2. 3. 4. 5.
Receiver
The sender isn’t sure what message to communicate. The message is not clearly encoded. The wrong communication channel is chosen. The message is not received or decoded properly. The receiver doesn’t have the experience or time to understand the message.
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When managers wrongly assume that communication is easy, they reduce communication to something called the “conduit metaphor.”22 Strictly speaking, a conduit is a pipe or tube that protects electrical wire. The conduit metaphor refers to the mistaken assumption that senders can pipe their intended messages directly into the heads of receivers with perfect clarity and without noise or perceptual filters interfering with the receivers’ understanding of the message. However, this just isn’t possible. Even if managers could telepathically direct their thoughts straight into receivers’ heads, misunderstandings and communication problems would still occur because words and symbols typically have multiple meanings, depending on how they’re used. For example, Exhibit 15.4 shows several meanings of an extremely common word, fine. Depending on how you use it, fine can mean a penalty; a good job; that something is delicate, small, pure, or flimsy; or that something is okay. 1. If you exceed the 55 mph speed limit, you may have to pay a fine (meaning a penalty).
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conduit metaphor The mistaken assumption that senders can pipe their intended messages directly into the heads of receivers with perfect clarity and without noise or perceptual filters interfering with the receivers’ understanding of the message.
Exhibit 15.4 Meanings of the Word Fine
2. During the playoffs, Shaquille O’Neal turned in a fine performance (meaning excellent). 3. The machine has to run at a slow speed because the tolerance is extremely fine (meaning tight). 4. Putting this puzzle together is difficult because many of the pieces are so fine (meaning small). 5. Recently, experiments have been conducted on manufacturing certain drugs in space. It is hoped that these drugs, as compared to those manufactured on earth, will be extremely fine (meaning pure). 6. Be careful when you handle that antique book. Its pages are extremely fine (meaning flimsy). 7. That’s fine with me (meaning okay).
In summary, the conduit metaphor causes problems in communication by making managers too complacent and confident in their ability to easily and accurately transfer messages to receivers. Managers who want to be effective communicators need to carefully choose words and symbols that will help receivers derive the intended meaning of a message. Furthermore, they need to be aware of all steps of the communication process, beginning with the sender (message to be conveyed, encoding the message, transmitting the message) and ending with the receiver (receiving message, decoding message, understanding the message, and using feedback to communicate what was understood).
2.2 Formal Communication Channels An organization’s formal communication channel is the system of official channels that carry organizationally approved messages and information. Organizational objectives, rules, policies, procedures, instructions, commands, and requests for information are all transmitted via the formal communication system or “channel.” There are three formal communication channels: downward communication, upward communication, and horizontal communication.23 Downward communication flows from higher to lower levels in an organization. Downward communication is used to issue orders down the organizational hierarchy, to give organizational members job-related information, to give managers and workers performance reviews from upper managers, and to clarify organizational objectives and goals.24 When an economic downturn quickly caused a significant drop in sales at Agilent, a technology company, CEO Ned Barnholt summoned his top managers. Together, they decided that their first strategy would be to freeze hiring, cut expenses, and cut temporary workers. Then, through
formal communication channel The system of official channels that carry organizationally approved messages and information.
downward communication Communication that flows from higher to lower levels in an organization.
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upward communication Communication that flows from lower to higher levels in an organization.
horizontal communication Communication that flows among managers and workers who are at the same organizational level.
emails, the twice-weekly company newsletter, and a speech played over the public-address system at all Agilent facilities, Barnholt explained why the cuts were necessary and how they would help the company; then he encouraged the troops to cut costs any way they could. Agilent managers reinforced the message at “coffee talks,” the regular brainstorming meetings that they hold with their employees. Employees responded by using Web sites to house data electronically (to avoid printing costs), staying with friends and family when on company travel (to avoid hotel charges), and bringing bags of potato chips to company recruiting events (to avoid costly catering charges). Within months, thanks to effective downward communicating, Agilent’s travel expenses had dropped by 50 percent, and the company’s purchases of personal computers had dropped by 70 percent.25 Upward communication flows from lower levels to higher levels in an organization. Upward communication is used to give higher-level managers feedback about operations, issues, and problems; to help higher-level managers assess organizational performance and effectiveness; to encourage lower-level managers and employees to participate in organizational decision making; and to give those at lower levels the chance to share their concerns with higher-level authorities. Citibank Malaysia started a program called “pulse lunches,” in which the top managers in each Citibank market would take employees’ “pulses” by listening to their concerns at lunch and then address those concerns soon after. At first, Citibank’s Malaysian employees were suspicious, fearing that their comments would not be kept confidential or that management would punish people for being critical or speaking out. Mohd Rahmat, who attended one of the first lunches, said, “No one could believe that the [local] CEO wanted to come and talk to employees.” Perceptions changed, however, as Citibank managers worked hard to address employees’ problems.26 Now, as a result of the pulse lunches, Citibank Malaysia’s employees formally appraise their boss’s performance and are given time off after they’ve worked especially long hours on important projects. And, to encourage more feedback and prove that they were listening, the top managers who host pulse lunches typically send out post-lunch newsletters that summarize employees’ concerns without naming names.27 Today, Citibank uses pulse lunches in 102 different countries. Horizontal communication flows among managers and workers who are at the same organizational level. For instance, horizontal communication occurs when the day shift supervisor comes in at 7:30 A.M. for a half-hour discussion with the midnight shift supervisor who leaves at 8:00 A.M., or when the regional marketing director meets with the regional accounting director to discuss costs and plans for a new marketing campaign. Horizontal communication helps facilitate coordination and cooperation between different parts of a company and allows coworkers to share relevant information. It also helps people at the same level resolve conflicts and solve problems without involving high levels of management. For example, just by taking the time to share scheduling information across divisions, the California highway construction department saved millions of dollars; the divisions were able to coordinate their efforts and thereby avoid ripping up and resurfacing the same roads several times over the course of different projects. Likewise, Siemens and Osram Sylvania have instituted formal communication at factory shift changes; supervisors from the departing work shift meet with the supervisors from the incoming shift to discuss problems and issues (e.g., parts that are needed, machines that are malfunctioning) that arose during the shift.28 In general, what can managers do to improve formal communication? First, decrease reliance on downward communication. Second, increase chances for upward communication by increasing personal contact with lower-level managers and workers. Third, as at Siemens and Osram Sylvania, encourage much greater use of horizontal communication. Finally, be aware of the problems associated with downward, upward, and horizontal communication, some of which are listed in Exhibit 15.5.
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DOWNWARD COMMUNICATION
UPWARD COMMUNICATION
HORIZONTAL COMMUNICATION
A Overusing downward communication by sending too many messages
A The risk involved with telling upper management about problems (i.e., fear of retribution)
A Management discouraging or punishing horizontal communication, viewing it as small talk
A Issuing contradictory messages
A Managers reacting angrily and defensively when workers report problems
A Not giving managers and workers the time or opportunity for horizontal communication
A Hurriedly communicating vague, unclear messages
A Not enough opportunities or channels for lower-level workers to contact upper levels of management
A Not enough opportunities or channels for lower-level workers to engage in horizontal communication
A Issuing messages that indicate management’s low regard for lower-level workers Source: G. L. Kreps, Organizational Communication: Theory and Practice (New York: Longman, 1990).
2.3 Informal Communication Channels An organization’s informal communication channel, sometimes called the “grapevine,” is the transmission of messages from employee to employee outside of formal communication channels. The grapevine arises out of curiosity, that is, the need to know what is going on in an organization and how it might affect you or others. To satisfy this curiosity, employees need a consistent supply of relevant, accurate, in-depth information about “who is doing what and what changes are occurring within the organization.”29 Employee Paul Haze agrees, saying, “If employees don’t have a definite explanation from management, they tend to interpret for themselves.”30 For example, at the University of Texas Medical Branch (part of the UT system), any of the 13,000 employees wanting to know the truth about rumors working their way through the campus grapevine can log on to the school’s Web site and click on “Rumors or Trumors.” Campus administrators comment on each posted rumor and rate it using the “kernel of truth” system. As shown in Exhibit 15.6, one kernel of corn indicates a little bit of truth. Two kernels indicate that more of the rumor is accurate, but it’s still not entirely true. Three kernels indicate that the rumor is accurate. Wildly inaccurate rumors, such as the one in Exhibit 15.6 about new ID tags being able to track employees’ location, are rated with a spaceship, indicating that they’re too far out to be believed. Reaction thus far has been positive. Lecturer Sheryl Prather says, “It looks sincere. I’ve found that everything thus far has been pretty factual. It at least shows that somebody’s listening to some of the talk that goes on around here and [is] putting it down on the computer where we can all see it.”31 Grapevines arise out of informal communication networks, such as the gossip or cluster chains shown in Exhibit 15.7. In a gossip chain, one “highly connected” individual shares information with many other managers and workers. By contrast, in a cluster chain, numerous people simply tell a few of their friends. The result in both cases is that information flows freely and quickly through the organization. Some believe that grapevines are a waste of employees’ time, that they promote gossip and rumors that fuel political speculation, and that they are sources of highly unreliable, inaccurate information. Yet studies clearly show that grapevines are highly accurate sources of information for a number of reasons.32 First, because grapevines typically carry “juicy” information that is interesting and
Exhibit 15.5 Common Problems with Downward, Upward, and Horizontal Communication
informal communication channel (“grapevine”) The transmission of messages from employee to employee outside of formal communication channels.
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Exhibit 15.6 “Rumors or Trumors” at the University of Texas Medical Branch
Rumor: I heard that the new “smart” ID badges will store all kinds of my private information, and worse, they can be used to track where I am at UTMB. True? Rating:
TRUTH-O-METER = Want to buy some swampland? = A “kernel” of truth = Maybe, but... = The whole truth
Response: No, the cards will not contain anything but the most basic information, much as ID cards do today. No personal data, no employment history, no critical financial info or medical records. The cards will primarily verify identity (your photo and name help do that) and access, the same way magnetic strips and keys do now. In the future, they will also enable a user, at his/her discretion, to use them as a debit card for campus purchases, like a pre-paid phone card, and will help manage access to computer resources.
The cards can’t track your location. The proximity readers are designed with a narrow sensitivity field (you wouldn’t want doors unexpectedly unlocking because someone with access is walking in a nearby hallway). However, the system does register when you are in or out of a restricted area. This is no different than is currently the case with the magnetic key cards, and is an important aspect of maintaining security in sensitive research, clinical, and business areas.
Source: “UTMB’s Rumors or Trumors,” The University of Texas Medical Branch, [Online] available at http://www.utmb.edu/ rumor/rumors%5Farchive%5F15.htm, 12 June 2005.
timely, information spreads rapidly. At Meghan De Goyler Hauser’s former company, the word on the grapevine was that her boss drank on the job, the company accountant was stealing the company blind, and that one of her coworkers was a nude model. She says, “The rumors all turned out to be true.”33 Second, since information is typically spread by face-to-face conversation, receivers can send feedback to make sure they understand the message that is being communicated. This reduces misunderstandings and increases accuracy. Third, since most of the information in a company moves along the grapevine, as opposed to formal communication channels, people can usually verify the accuracy of information by “checking it out” with others. What can managers do to “manage” organizational grapevines? The very worst thing managers can do is withhold information or try to punish those who share information with others. The grapevine abhors a vacuum, and in the absence of information from company management, rumors and anxiety will flourish. For Exhibit 15.7 example, employee Tim Weidman says that when the software services company Grapevine Communication Networks he was working for announced it was considering layoffs, “People tried to get work done, but they were posting their résumés and checking Monster.com every day. Everyone had their résumés on the Gossip Cluster street.”34 According to management professor Allan Kimmel, if Chain Chain managers “don’t come through with their promises, or they communicate the full store [of information] ineffectively, they have themselves to blame.”35 A better strategy is to embrace the grapevine and keep employees informed about possible changes and strategies. Management consultant Arnold Brown says that managers should “identify the key people in [their] company’s grapevine and, instead of punishing them, feed them information. When a company issues a press release it knows what newspapers to contact, so why not know your internal media?”36 Finally, in addition to using the grapevine to communicate with others, managers should not overlook the grapevine as a tremendous source of valuable information and feedback. In Source: K. Davis & J. W. Newstrom, Human Behavior at Work: fact, information flowing through organizational grapevines is Organizational Behavior, 8th ed. (New York: McGraw-Hill, 1989). estimated to be 75 to 95 percent accurate.37 For this reason,
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managers should gather their courage and be 1. Correct misinformation. Put an end to false rumors and set willing to read the anonymous comments that the record straight. Don’t be defensive. angry, frustrated employees post on Internet 2. Don’t take angry comments personally. “gripe sites” like untied.com (about United Air3. Give your name and contact number to show employees that lines), stainedapron.com (for griping restaurant you’re concerned and that they can contact you directly. workers), or vault.com, where employees post gripes about hundreds of different companies. 4. Hold a town meeting to discuss the issues raised on the gripe Bob Rosner, who runs a gripe site called workingsite. wounded.com, suggests managers look for 5. Set up anonymous internal discussion forums on the company themes rather than responding to any particular server. Then encourage employees to gripe anonymously on message. Mark Oldman, cofounder of vault.com, the company intranet, rather than on the Web. says, “Most companies are delighted that we provide a forum to talk candidly for better or worse Source: J. Simons, “Stop Moaning about Gripe Sites and Log On,” Fortune, 2 April 2001, 181. about a company. It [vault.com] basically just Exhibit 15.8 digitizes what already happens offline at the water cooler.”38 And Jeff Jarvis, Organizational Grapevines: Dealing author of The Blog BuzzMachine, says, “There should be someone at every with Internet Gripe Sites company whose job is to put into Google and blog search engines the name of the company or the brand, followed by the word ‘sucks,’ just to see what customers [and employees] are saying.”39 Exhibit 15.8 lists other strategies that today’s managers can use in dealing with gripe sites and blogs, the newest forms of the traditional organizational grapevine. See Section 4.2 for more on how managers can use blogs to do a better job of hearing what employees and customers feel and think about their companies.
2.4 Coaching and Counseling: One-on-One Communication When the Wyatt Company surveyed 531 U.S. companies undergoing major changes and restructuring, it asked their CEOs, “If you could go back and change one thing, what would it be?” The answer? “The way we communicated with our employees.” The CEOs said that instead of flashy videos, printed materials, or formal meetings, they would make greater use of one-on-one communication, especially with employees’ immediate supervisors instead of with higher-level executives that employees didn’t know.40 Coaching and counseling are two kinds of one-on-one communication. Coaching is communicating with someone for the direct purpose of improving the person’s on-the-job performance or behavior.41 Managers tend to make several mistakes when coaching employees, however. First, they wait for a problem before coaching. Jim Concelman, who is manager for leadership development at Development Dimensions International, says, “Of course, a boss has to coach an employee if a mistake has been made, but they shouldn’t be waiting for the error. While it is a lot easier to see a mistake and correct it, people learn more through success than through failure, so bosses should ensure that employees are experiencing as many successes as possible. Successful employees lead to a more successful organization.”42 Second, when mistakes are made, managers wait much too long before talking to the employee about the problem. Management professor Ray Hilgert says, “A manager must respond as soon as possible after an incident of poor performance. Don’t bury your head. . . . When employees are told nothing, they assume everything is okay.”43 Third, when managers finally work up the courage to confront the employee, they sometimes get angry. Michael Markovitz, CEO of Argosy Education Group, says, “Managers are angry, and they yell and criticize the employee. That almost never works. It’s demeaning to the employee, and the positive message gets lost. You feel mad because an employee isn’t doing his or her job? Go to the gym or walk around the block—exercise is a great cure for anger. Your anger is understandable, but you still must not abuse your employees.”44 In Section 3, you’ll learn a number of specific steps for effective one-on-one communication and coaching.
coaching Communicating with someone for the direct purpose of improving the person’s on-the-job performance or behavior.
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By contrast, counseling is communicating with someone about non-job-related issues that may Stress, depression, relationships, Counseling be affecting or interfering with the person’s persubstance abuse formance. However, counseling does not mean that managers should try to be clinicians, even Pregnancy, adoption, day care, Child care though an estimated 20 percent of employees are nutrition, fertility dealing with personal problems at any one time. Health and nutrition, care Senior care Dana Kiel, who works for CIGNA Behavioral options, Alzheimer’s disease Health, says, “We call it the quicksand. If you’re Wills, leases, estate plans, Legal services a good supervisor, you do care about your emadoptions ployees, but it’s not your job to be a therapist.”45 Referrals and discounts on chiropractic Health/lifestyle Instead, managers should discuss specific perforcare, acupuncture, massage assistance mance problems, listen if the employee chooses to therapy, vitamins share personal issues, and then recommend that the employee call the company’s Employee AssisPet-sitting resources, obedience Pet care tance Program (EAP). EAPs are typically free training, veterinarians when provided as part of a company’s benefit Retirement planning, debt Financial services package. In emergencies or times of crisis, EAPs consolidation, budgeting can offer immediate counseling and support; they Source: “You Can Do It. We Can Help,” CIGNA Behavioral Health, [Online] available at can also provide referrals to organizations and http://www.hr.tcu.edu/eappages/core/html/default.html, 30 March 2002. professionals that can help employees and their Exhibit 15.9 family members address personal issues. Exhibit 15.9 lists the standard services Services Provided by Employee provided by EAPs. PROBLEM OR NEED
SERVICE PROVIDED
Assistance Programs (EAPs)
counseling Communicating with someone about non-job-related issues that may be affecting or interfering with the person’s performance.
nonverbal communication Any communication that doesn’t involve words.
kinesics Movements of the body and face.
2.5 Nonverbal Communication When people talk, they send both verbal and nonverbal messages. Verbal messages are sent and received through the words we speak. “That was a great presentation.” By contrast, nonverbal messages are sent through body language, facial expressions, or tone of voice. For instance, hearing “THAT was a GREAT presentation!” is very different from hearing “ahem [clearing throat], that was, ahem, ahem, a great presentation.” More specifically, nonverbal communication is any communication that doesn’t involve words. Nonverbal communication and messages almost always accompany verbal communication and may support and reinforce the verbal message or contradict it. The importance of nonverbal communication is well established. Researchers have estimated that as much as 93 percent of any message is transmitted nonverbally, with 55 percent coming from body language and facial expressions and 38 percent coming from the tone and pitch of the voice.46 Since many nonverbal cues are unintentional, receivers often consider nonverbal communication to be a more accurate representation of what senders are thinking and feeling than the words they use. If you have ever asked someone out on a date and been told “yes,” but realized that the real answer was “no,” then you understand the importance of paying attention to nonverbal communication. Kinesics and paralanguage are two kinds of nonverbal communication.47 Kinesics (from the Greek word kinesis, meaning “movement”) are movements of the body and face.48 These movements include arm and hand gestures, facial expressions, eye contact, folding arms, crossing legs, and leaning toward or away from another person. For example, people tend to avoid eye contact when they are embarrassed or unsure of the message they are sending. Crossed arms and/or legs usually indicate defensiveness or that the person is not receptive to the message or the sender. Also, people tend to smile frequently when they are seeking someone’s approval. It turns out that kinesics play an incredibly important role in communication. Studies of married couples’ kinesic interactions can predict whether they will stay married with 93 percent accuracy.49 The key is the ratio of positive to negative kinesic interactions that husbands and wives make as they communicate.
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Negative kinesic expressions such as eye rolling suggest contempt, whereas positive kinetic expressions such as maintaining eye contact and nodding suggest listening and caring. When the ratio of positive to negative interactions drops below 5 to 1, the chances for divorce quickly increase. Kinesics operate similarly in the workplace, providing clues about people’s true feelings, over and beyond what they say (or don’t say). For instance, Louis Giuliano, CEO of ITT, which makes heavy use of teams, says, “When you get a team together and say to them we’re going to change a process, you always have people who say, ‘No, we’re not.’” They usually don’t say it out loud, but “the body language is there,” making it clear that their real answer is Nonverbal communication is equally, “no.”50 if not more, important than the Paralanguage includes the pitch, rate, tone, volume, and speaking pattern words being spoken. In this photo, (i.e., use of silences, pauses, or hesitations) of one’s voice. For example, when the gentleman with his arms crossed people are unsure what to say, they tend to decrease their communication effec- could be considered unreceptive to his co-worker’s message. tiveness by speaking softly. When people are nervous, they tend to talk faster and louder. These characteristics have a tremendous influence on whether listeners are receptive to what PROTECT PERSONAL, CONFIDENTIAL speakers are saying. For example, Vinya Lynch believes that INFORMATION her “timid and sing songy” voice is why others don’t take her By virtue of their jobs, managers are privy to seriously and cut her off when she makes presentations. Lynch information that others aren’t. Although says, “When I listen to myself, it doesn’t sound intelligent.” much of that information will be about the She began working with a speech coach ($2,250 for 10 company, some of it will be personal and sessions) because, as she says, “I want my voice to be charisconfidential information about employees. 51 matic and confident all at the same time.” As a manager, you have a moral and legal In short, because nonverbal communication is so informaobligation to protect employees’ privacy. tive, especially when it contradicts verbal communication, Moreover, sharing others’ personal, confimanagers need to learn how to monitor and control their nondential information may dissuade employees from confiding in managers or seeking help verbal behavior.
HE R IGHT T G T H I IN NG DO
from a company’s employee assistance pro-
gram. Does this mean that if employees conReview 2: Kinds of Communication fide in you that you can’t tell anyone else? Organizational communication depends on the communication No, if you’re a manager, sometimes you may process, formal and informal communication channels, one-onhave to inform your boss or human resources one communication, and nonverbal communication. The major about a situation. But only inform those who components of the communication process are the sender, the have a need to know and who are also obligreceiver, noise, and feedback. The conduit metaphor refers to the ated to protect employee privacy. Furthermistaken assumption that senders can pipe their intended mesmore, not all information that employees sages directly into receivers’ heads with perfect clarity. With disclose to you should be protected. Infornoise, perceptual filters, and little feedback, however, this just mation about discrimination, sexual harassment, potential workplace violence, or conisn’t possible. Formal communication channels, such as downflicts of interest between employees and the ward, upward, and horizontal communication, carry organizacompany may need to be shared with upper tionally approved messages and information. By contrast, the management to protect the rights and wellinformal communication channel, called the “grapevine,” arises being of others. So, when employees disout of curiosity and is carried out through gossip or cluster close personal, confidential information, do chains. Managers should use the grapevine to keep employees the right thing. Don’t discuss it with others informed and to obtain better, clearer information for themunless it falls into one of the exceptions disselves. There are two kinds of one-on-one communication. cussed here.52 Coaching is used to improve on-the-job performance while counseling is used to communicate about non-job-related issues affecting job performance. Nonverbal communication, such as paralanguage kinesics and paralanguage, accounts for as much as 93 percent of a message’s The pitch, rate, tone, volume, and content and understanding. Since nonverbal communication is so informative, speaking pattern (i.e., use of silences, managers need to learn how to monitor and control their nonverbal behavior. pauses, or hesitations) of one’s voice.
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How to Improve Communication An employee comes in late every day, takes long lunches, and leaves early. His coworkers resent his tardiness and having to do his share of the work. Another employee makes as many as 10 personal phone calls a day on company time. Still another employee’s job performance has dropped significantly in the last three months. How do you communicate with these employees to begin solving these problems? Or suppose that you supervise a division of 50, 100, or even 1,000 people. How can you communicate effectively with everyone in that division? Moreover, how can top managers communicate effectively with everyone in the company when employees work in different offices, states, countries, and time zones? Turning that around, how can managers make themselves accessible so that they can hear what employees feel and think throughout the organization? When it comes to improving communication, managers face two primary tasks, managing one-on-one communication and managing organization-wide communication. 3 4
3
After reading the next two sections, you should be able to explain how managers can manage effective one-on-one communication. describe how managers can manage effective organization-wide communication.
MANAGING ONE-ON-ONE COMMUNICATION
In Chapter 1, you learned that, on average, first-line managers spend 57 percent of their time with people, middle managers spend 63 percent of their time directly with people, and top managers spend as much as 78 percent of their time dealing with people.53 These numbers make it clear that managers spend a great deal of time in one-on-one communication with others. Learn more about managing one-on-one communication by reading how to 3.1 choose the right communication medium, 3.2 be a good listener, 3.3 give effective feedback, and 3.4 improve cross-cultural communication.
3.1 Choosing the Right Communication Medium communication medium The method used to deliver an oral or written message.
Sometimes messages are poorly communicated simply because they are delivered using the wrong communication medium, which is the method used to deliver a message. For example, the wrong communication medium is being used when an employee returns from lunch, picks up the note left on her office chair, and learns she has been fired. The wrong communication medium is also being used when an employee pops into your office every 10 minutes with a simple request. (An email would be better.) There are two general kinds of communication media: oral and written communication. Oral communication includes face-to-face and group meetings through telephone calls, videoconferencing, or any other means of sending and receiving spoken messages. Studies show that managers generally prefer oral communication over written because it provides the opportunity to ask questions about parts of the message that they don’t understand. Oral communication is also a rich communication medium because it allows managers to receive and assess the nonverbal communication that accompanies spoken messages (i.e., body language, facial expressions, and the voice characteristics associated with paralanguage). Furthermore, you don’t need a personal computer and an Internet connection to conduct oral communication. Simply schedule an appointment, track someone down in the hall, or catch someone on the phone. In fact, management consultant Tom Durel worries that
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with voice mail and email, managers are not as willing to engage in meaningful, face-to-face oral communication as they once were. In fact, 67 percent of managers admit to using email as a substitute for face-to-face conversations.54 Durel says, “Why is it that the first thing people do in the morning is turn on their computer and send email to a colleague in the office next door? What’s wrong with getting up, walking over there, and actually talking to that person?”55 Oral communication should not be used for all communication, however. In general, when the message is simple, such as a quick request or a presentation of straightforward information, a memo or email is often the better communication medium. Written communication includes letters, email, and memos. Although most managers still like and use oral communication, email in particular is changing how they communicate with workers, customers, and each other. Email is the fastest-growing form of communication in organizations primarily because of its convenience and speed. For instance, because people read six times faster than they can listen, they usually can read 30 email messages in 10 to 15 minutes.56 By contrast, dealing with voice messages can take a considerable amount of time. Fred DeLuca, founder of the Subway sandwich shop franchise, says, “I get about 60 messages a day from employees and franchisees, and I listen to all of them. For my sanity, I set a time limit of 75 seconds, because people can be long-winded when they’re excited. When I hear, ‘You have 30 messages,’ I know right away that I’ll spend 60 minutes on voice mail. I take two minutes per message, listening and returning or forwarding.”57 Written communication, such as email, is well suited for delivering straightforward messages and information. Furthermore, with email accessible at the office, at home, and on the road (by laptop computer, cell phone, or Web-based email), managers can use email to stay in touch from anywhere at almost any time. And, since email and other written communications don’t have to be sent and received simultaneously, messages can be sent and stored for reading at any time. Consequently, managers can send and receive many more messages using email than using oral communication, which requires people to get together in person or by phone or videoconference. But, warns management consultant Tom Durel, “Don’t assume that you did your part just because you sent out a bunch of memos. If you really want to communicate, you need to take the time to get real-time feedback.”58 Although written communication is well suited for delivering straightforward messages and information, it is not well suited to complex, ambiguous, or emotionally laden messages, which are better delivered through oral communication. Neal Patterson, CEO of Cerner Corporation, which develops healthcare software, learned this lesson when he sent the following email to 400 company managers: We are getting less than 40 hours of work from a large number of our KC-based EMPLOYEES. . . . The parking lot is sparsely used at 8 A.M., likewise at 5 P.M. As managers—you either do not know what your EMPLOYEES are doing or YOU do not CARE. You have created expectations on the work effort which allowed this to happen inside Cerner, creating a very unhealthy environment. In either case, you have a problem and you will fix it or I will replace you. NEVER in my career have I allowed a team which worked for me to think they had a 40-hour job. I have allowed YOU to create a culture which is permitting this. NO LONGER.59 Patterson continued: “We passed a Stock Purchase Program, allowing for the EMPLOYEE to purchase Cerner stock at a 15 percent discount, at Friday’s BOD [board of directors] meeting. Hell will freeze over before this CEO implements ANOTHER EMPLOYEE benefit in this Culture.”60 He concluded
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by saying, “I will hold you accountable. You have allowed this to get to this state. You have two weeks. Tick, tock.”61 Reaction to the message was so strong that, in just over a week, the email had been leaked to the entire company. And then someone, nobody knows who, posted the email on a Yahoo.com discussion board about Cerner. As word spread about the negative email, Cerner’s stock price dropped from $44 to $31 per share in just three days. By the end of the week, Patterson issued another email, offering an apology. Not surprisingly, that email began, “Please treat this memo with the utmost confidentiality. It is for internal dissemination only. Do not copy or email to anyone else.”62
3.2 Listening
hearing The act or process of perceiving sounds.
listening Making a conscious effort to hear.
active listening Assuming half the responsibility for successful communication by actively giving the speaker nonjudgmental feedback that shows you’ve accurately heard what he or she said.
Are you a good listener? You probably think so. But, in fact, most people, including managers, are terrible listeners, retaining only about 25 percent of what they hear.63 You qualify as a poor listener if you frequently interrupt others, jump to conclusions about what people will say before they’ve said it, hurry the speaker to finish his or her point, are a passive listener (not actively working at your listening), or simply don’t pay attention to what people are saying.64 On this last point, attentiveness, college students were periodically asked to record their thoughts during a psychology course. On average, 20 percent of the students were paying attention (only 12 percent were actively working at being good listeners), 20 percent were thinking about sex, 20 percent were thinking about things they had done before, and the remaining 40 percent were thinking about other things unrelated to the class (e.g., worries, religion, lunch, daydreaming).65 How important is it to be a good listener? In general, about 45 percent of the total time you spend communicating with others is spent listening. Furthermore, listening is important for managerial and business success, even for those at the top of an organization. According to Fortune magazine, listening is one of the reasons that CEO A. G. Lafley has been able to turn around Procter & Gamble so quickly: “He’s a listener, not a storyteller. He’s likable but not awe inspiring. He’s the type of guy who gets excited in the mop aisle of a grocery store. His plan to fix P&G isn’t anything groundbreaking, but rather a straightforward, back-to-basics tack. And so far it’s worked. He has rallied his troops not with big speeches and dazzling promises, but by hearing them out (practically) one at a time.”66 As Feargal Quinn, CEO of Irish grocery chain Superquinn’s, points out, “Listening is not an activity you can delegate—no matter who you are.”67 In fact, managers with better listening skills are rated as better managers by their employees and are much more likely to be promoted.68 So, what can you do to improve your listening ability? First, understand the difference between hearing and listening. According to Webster’s New World Dictionary, hearing is the “act or process of perceiving sounds,” whereas listening is “making a conscious effort to hear.” In other words, we react to sounds, such as bottles breaking or music being played too loud, because hearing is an involuntary physiological process. By contrast, listening is a voluntary behavior. So, if you want to be a good listener, you have to choose to be a good listener. Typically, that means choosing to be an active, empathetic listener.69 Active listening means assuming half the responsibility for successful communication by actively giving the speaker nonjudgmental feedback that shows you’ve accurately heard what he or she said. Active listeners make it clear from their behavior that they are listening carefully to what the speaker has to say. Active listeners put the speaker at ease, maintain eye contact, and show the speaker that they are attentively listening by nodding and making short statements.
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CLARIFYING RESPONSES
PARAPHRASING RESPONSES
SUMMARIZING RESPONSES
Could you explain that again?
What you’re really saying is . . . .
Let me summarize . . . .
I don’t understand what you mean.
If I understand you correctly . . . .
Okay, your main concerns are . . . .
I’m not sure how . . . .
In other words . . . .
To recap what you’ve said . . . .
I’m confused. Would you run through that again?
So your perspective is that . . . .
Thus far, you’ve discussed . . . .
Tell me if I’m wrong, but what you’re saying is . . . . Source: E. Atwater, I Hear You, revised ed. (New York: Walker, 1992).
Several specific strategies can help you be a better active listener. First, clarify responses by asking the speaker to explain confusing or ambiguous statements. Second, when there are natural breaks in the speaker’s delivery, use this time to paraphrase or summarize what has been said. Paraphrasing is restating what has been said in your own words. Summarizing is reviewing the speaker’s main points or emotions. Paraphrasing and summarizing give the speaker the chance to correct the message if the active listener has attached the wrong meaning to it. Paraphrasing and summarizing also show the speaker that the active listener is interested in the speaker’s message. Exhibit 15.10 lists specific statements that listeners can use to clarify responses, paraphrase, or summarize what has been said. Active listeners also avoid evaluating the message or being critical until the message is complete. They recognize that their only responsibility during the transmission of a message is to receive it accurately and derive the intended meaning from it. Evaluation and criticism can take place after the message is accurately received. Finally, active listeners also recognize that a large portion of any message is transmitted nonverbally and thus pay very careful attention to the nonverbal cues transmitted by the speaker. Empathetic listening means understanding the speaker’s perspective and personal frame of reference and giving feedback that conveys that understanding to the speaker. Empathetic listening goes beyond active listening because it depends on our ability to set aside our own attitudes or relationships to be able to see and understand things through someone else’s eyes. Empathetic listening is just as important as active listening, especially for managers, because it helps build rapport and trust with others. The key to being a more empathetic listener is to show your desire to understand and to reflect people’s feelings. You can show your desire to understand by listening, that is, asking people to talk about what’s most important to them and then by giving them sufficient time to talk before responding or interrupting. Management consultant Neil Grammer tells this story about being an empathetic listener: One of the best sales meetings I’ve ever had taught me a valuable lesson about the importance of listening. The meeting was with an investment bank’s managing director. The appointment lasted 30 minutes—28 of those minutes were spent by the director telling me everything about his business and personnel. I told him nothing more about my company and its services than I had in our initial phone conversation. As the meeting concluded, he enthusiastically shook my hand and proclaimed how much he was looking forward to working with me—someone who understood his business.70 Reflecting feelings is also an important part of empathetic listening because it demonstrates that you understand the speaker’s emotions. Unlike active listening, in which you restate or summarize the informational content of what
Exhibit 15.10 Clarifying, Paraphrasing, and Summarizing Responses for Active Listeners
empathetic listening Understanding the speaker’s perspective and personal frame of reference and giving feedback that conveys that understanding to the speaker.
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has been said, the focus is on the affective part of the message. As an empathetic listener, you can use the following statements to reflect the speaker’s emotions: • • • •
So, right now it sounds like you’re feeling . . . . You seem as if you’re . . . . Do you feel a bit . . . ? I could be wrong, but I’m sensing that you’re feeling . . . .
In the end, says management consultant Terry Pearce, empathetic listening can be boiled down to these three steps. First, wait 10 seconds before you answer or respond. It will seem an eternity, but waiting prevents you from interrupting others and rushing your response. Second, to be sure you understand what the speaker wants, ask questions to clarify the speaker’s intent. Third, only then should you respond first with feelings and then facts (notice that facts follow feelings).71
3.3 Giving Feedback
destructive feedback Feedback that disapproves without any intention of being helpful and almost always causes a negative or defensive reaction in the recipient.
In Chapter 11, you learned that performance appraisal feedback (i.e., judging) should be separated from developmental feedback (i.e., coaching).72 At this point, we now focus on the steps needed to communicate feedback one-on-one to employees. To start, managers need to recognize that feedback can be constructive or destructive. Destructive feedback is disapproving without any intention of being helpful and almost always causes a negative or defensive reaction in the recipient. In fact, one study found that 98 percent of employees responded to destructive feedback from their bosses with either verbal aggression (two-thirds) or physical aggression (one-third).73 Surprisingly, some managers don’t realize that they’re giving people destructive feedback. One employee said: A project that my team was working on had a number of delays, and one of them involved something that I was responsible for. The pressure was on, and we were all putting in long hours to catch up. But in the middle of that, my boss called me into his office, and with the door wide open, he started yelling about the delay, about how much it was costing, and about how it was making him look bad. Anyone in that whole corner of the building could easily hear. It was so ridiculous. I was doing everything I could, and yet he lost his temper and acted as if I was doing something to personally offend him.74
constructive feedback Feedback intended to be helpful, corrective, and/or encouraging.
By contrast, constructive feedback is intended to be helpful, corrective, and/or encouraging. It is aimed at correcting performance deficiencies and motivating employees. When providing constructive feedback, Jenet Noriega Schwind, vice president and chief people officer of Zantaz.com, an e-business archiving company, tells employees, “What I’m going to tell you may be upsetting to you— but it’s important to your success.” She says, “When you are telling people things they don’t necessarily want to hear, you have to deliver your message in a way that gets their attention and acceptance.”75 For feedback to be constructive rather than destructive, it must be immediate, focused on specific behaviors, and problem oriented. Immediate feedback is much more effective than delayed feedback because manager and worker can recall the mistake or incident more accurately and discuss it in detail. For example, if a worker is rude to a customer and the customer immediately reports the incident to management, and the manager, in turn, immediately discusses the incident with the employee, there should be little disagreement over what was said or done. By contrast, if the manager waits several weeks to discuss the incident, it’s unlikely that either the manager or the worker will be able to accurately remember the specifics of what occurred. When that happens, it’s usually too late to have a meaningful conversation.
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Specific feedback focuses on particular acts or incidents that are clearly under the control of the employee. For instance, instead of telling an employee that he or she is “always late for work,” it’s much more constructive to say, “In the last three weeks, you have been 30 minutes late on four occasions and more than an hour late on two others.” Furthermore, specific feedback isn’t very helpful unless employees have control over the problems that the feedback addresses. Indeed, giving negative feedback about behaviors beyond someone’s control is likely to be seen as unfair. Similarly, giving positive feedback about behaviors beyond someone’s control may be viewed as insincere. Last, problem-oriented feedback focuses on the problems or incidents associated with the poor performance rather than on the worker or the worker’s personality. Giving feedback does not give managers the right to personally attack workers. Though managers may be frustrated by a worker’s poor performance, the point of problem-oriented feedback is to draw attention to the problem in a nonjudgmental way so that the employee has enough information to correct it. For example, if an employee has body odor, a surprisingly common workplace problem, don’t leave deodorant, soap, or shampoo on the person’s desk (for all to see) or say, “you stink.” HR Magazine advises handling the problem this way: “Because this is a sensitive issue and the employee will likely be uncomfortable and embarrassed in discussing it, keep the meeting private and confidential. Be compassionate but direct. Treat it as you would handle any other job-related performance issue. Explain the problem and the need to correct it. Be specific about expectations. . . . If the employer has a dress and grooming policy, refer to the policy and provide the employee with a copy.”76
3.4 Improving Cross-Cultural Communication As you know by now, effective communication is very difficult to accomplish. Cross-cultural communication, which involves transmitting information from a person in one country or culture to a person from another country or culture, is even more difficult. For example, when a French company bought a U.S. company, it found that the American managers would not implement the new strategy that it recommended. As tensions grew worse, the American managers challenged their new French boss’s strategy and explained why they hadn’t followed it. Meanwhile, the French, who now owned the company, couldn’t understand why the American managers, who, after all, worked for them, didn’t just do as they were told.77 Exhibit 15.11, which shows the rather different views that French and American workers have about work, gives us some insight into the difficulty of cross-cultural communication in this situation. Overall, the French are much more likely to believe that managers need to have precise answers to subordinates’ questions (53 percent versus 18 percent), that organizations would be better off without conflict (24 percent versus 5 percent), and that managers are more motivated by power than by achieving objectives (56 percent versus 36 percent).78 With such different views on these basic topics, no wonder there were communication difficulties. You can do a number of things to increase your chances for successful crosscultural communication: familiarize yourself with a culture’s general work norms; determine whether a culture is emotionally affective or neutral; develop respect for other cultures; and understand how address terms and attitudes toward time (polychronic versus monochronic time, and appointment, schedule, discussion, and acquaintance time) differ from culture to culture. In Chapter 8, you learned that expatriates who receive predeparture language and cross-cultural training make faster adjustments to foreign cultures and perform better on their international assignments.79 Therefore, the first step for successful cross-cultural communication is familiarizing yourself with a culture’s general work norms, that is, the shared values, beliefs, and perceptions
cross-cultural communication Transmitting information from a person in one country or culture to a person from another country or culture.
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Exhibit 15.11 A Comparison of French and American Views of Work
53% 18% United States
France
“Most organizations would be better off if conflict could be eliminated forever.” Percentage agreeing
Percentage agreeing
“It is important for a manager to have at hand precise answers to most questions subordinates may raise about their work.”
United States
France
Percentage agreeing
Percentage agreeing
56%
United States
France
“Most managers have a clear notion of what we call an organizational structure.”
“Most managers seem to be more motivated by obtaining power than by achieving objectives.”
36%
24% 5%
52% 32%
United States
France
Source: From N. J. Adler, From Boston to Beijing: Managing with a World View (Cincinnati, OH: South-Western, 2002), based on A. Laurent, “The Cultural Diversity of Western Conceptions of Management,” in International Studies of Management and Organization, vol. 13, no. 1–2 (Spring–Summer 1983): 75–96.
affective cultures Cultures in which people display emotions and feelings when communicating.
neutral cultures Cultures in which people do not display emotions and feelings when communicating.
toward work and how it should be done. (See Chapter 8 for a more complete discussion of international cultures.) And don’t assume that it will be easy. British engineer Mike Cantelo says, “In Europe, people are neighbors and they kind of look the same and it’s not far to travel and ‘I have been there on vacation and so it’s no big deal.’ But working in a culture is a hugely different thing.”80 Yet, no matter how difficult, you should work hard to learn different cultures and languages. When New Yorker Donald Dowling was working in his law firm’s Paris office, his boss came up to him at a Christmas party hugged him, and declared, “I love this guy because he speaks French.” Dowling says, “It took me a minute to figure out he wasn’t making fun of me. I think he just appreciated that I tried, unlike one American stationed in that office for two years who managed to pick up a total of three words.”81 Fortunately, books such as Kiss, Bow, or Shake Hands: How to Do Business in 60 Countries (by Terri Morrison, Wayne Conaway, George Borden, and Hans Koehler), Do’s and Taboos Around the World (by Roger E. Axtell), and Dun & Bradstreet’s Guide to Doing Business Around the World (by Terri Morrison, Wayne Conaway, and Joseph Douress) and Web sites such as Businessculture.com and Executiveplanet.com provide a wealth of information about countries, their cultures, and their work and communication norms. Determining whether a culture is emotionally affective or neutral is also important to cross-cultural communication. People in affective cultures tend to display their emotions and feelings openly when communicating, whereas people in neutral cultures do not.82 For example, while Italians are prone to strong bursts of emotion (positive and negative), Chinese don’t show strong emotions because doing so is thought to disrupt harmony and lead to conflict. Likewise, a smiling American is displaying happiness, but a smiling Japanese may be trying to hide another emotion or avoid answering a question.83 The mistake most managers make is misunderstanding the differences between affective and neutral cultures.
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IN AFFECTIVE CULTURES, PEOPLE
507
IN NEUTRAL CULTURES, PEOPLE
1. reveal thoughts and feelings through verbal and nonverbal communication.
1. don’t reveal what they are thinking or feeling.
2. express and show feelings of tension.
2. hide tension and only show it accidentally in face or posture.
3. let their emotions flow easily, intensely, and without inhibition.
3. suppress emotions, leading to occasional “explosions.”
4. admire heated, animated, and intense expression of emotion.
4. admire remaining cool, calm, and relaxed.
5. are used to touching, gesturing, and showing strong emotions through facial expressions (all are common).
5. resist touching, gesturing, and showing strong emotions through facial expressions.
6. make statements with emotion.
6. often make statements in an unexpressive manner.
Source: F. Trompenaars, Riding the Waves of Culture: Understanding Diversity in Global Business (London: Economist Books, 1994).
People from neutral cultures aren’t by definition cold and unfeeling. They just don’t show their emotions in the same way or with the same intensity as people from affective cultures. The key is to recognize the differences and then make sure your judgments are not based on the lack or presence of emotional reactions. Exhibit 15.12 provides a more detailed explanation of the differences between affective and neutral cultures. Respecting other cultures is also an important part of improving crosscultural communication. Because we use our own culture as the standard of comparison, it’s very easy to make the common mistake of assuming that “different” means “inferior.”84 Take this example:
Exhibit 15.12 Affective and Neutral Cultures
A Swiss executive waits more than an hour past the appointed time for his Spanish colleague to arrive and to sign a major supply contract. In his impatience he concludes that the Spaniard must be lazy and totally unconcerned about business.85 According to Professor Nancy J. Adler, The Swiss executive has misevaluated his colleague by negatively comparing the colleague’s behavior to his own culture’s standard for business punctuality. Implicitly, he has labeled his own culture’s behavior as good (“The Swiss arrive on time, especially for important meetings, and that is good.”) and the other culture’s behavior as bad (“The Spanish do not arrive on time and that is bad.”).86 According to Adler, “Evaluating others’ behavior rarely helps in trying to understand, communicate with, or conduct business with people from another culture.”87 The key, she says, is taking a step back and realizing that you don’t know or understand everything that is going on and that your assumptions and interpretations of others’ behavior and motives may be wrong. So, instead of judging or evaluating your international business colleagues, observe what they do. Also, delay your judgments until you have more experience with your colleagues and their culture. Lastly, treat any judgments or conclusions you do make as guesses, and then double-check those judgments or conclusions with others.88 The more patient you are in forming opinions and drawing conclusions, the better you’ll be at cross-cultural communication. Next, you can improve cross-cultural communication by knowing the address terms that different cultures use to address each other in the workplace.89 Address terms are the cultural norms that establish whether you address businesspeople by their first names, family names, or titles. When meeting for the first time, Americans and Australians tend to be informal and address each other by first names, even nicknames. Such immediate informality is not accepted in many cultures, however.
address terms Cultural norms that establish whether you should address businesspeople by their first names, family names, or titles.
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YURIKO NAKAO/REUTERS/LANDOV
For instance, an American manager working in one of his company’s British subsidiaries introduced himself as “Chuck” to his British employees and coworkers. Nonetheless, even after six months on the job, his British counterparts still referred to him as “Charles.” And the more he insisted they call him “Chuck,” the more they seemed to dig in their heels and call him “Charles.”90 So, to decrease defensiveness, know your address terms before addressing your international business counterparts. Understanding different cultural attitudes toward time is another major consideration for effective cross-cultural communication. Cultures tend to be either monochronic or polychronic in their orientation toward time.91 In monochronic cultures, people tend to do one thing at a time and view time as linear, meaning that time is the passage of sequential events. You may have heard the saying, “There are three stages in people’s lives: when they believe in Santa Claus, when they don’t believe in Santa Claus, and when they are Santa Claus.” The progression from childhood, to young adulthood, to parenthood (when they are Santa Claus) reflects a linear view of time. Schedules are important in monochronic cultures because you schedule time to get a particular thing done. Professor Frons Trompenaars, a noted researcher on international cultures and business, gives these examples of monochronic cultures:
After discovering manipulative sales and lending practices and lax controls against money laundering, the Japanese government ordered Citigroup to close its Japanese private banking business. As is customary in Japan, Citigroup Inc. CEO Charles Prince and Citibank Japan CEO Douglas Peterson bowed deeply in apology at the start of a Tokyo news conference announcing the findings.
monochronic cultures Cultures in which people tend to do one thing at a time and view time as linear.
polychronic cultures Cultures in which people tend to do more than one thing at a time and view time as circular.
In London I once saw a long queue of people waiting for a bus when it started pouring rain. They all stood stolidly, getting soaked even though cover was close by, lest they lose their sequential order. They preferred to do things right rather than do the right thing. In the Netherlands, you could be the queen, but if you are in a butcher’s shop with number 46 and you step up for service when number 12 is called, you are still in deep trouble. Nor does it matter if you have an emergency; order is order.92 By contrast, in polychronic cultures, people tend to do more than one thing at a time and view time as circular, meaning that time is a combination of the past, present, and future. Consider the following example from a polychronic culture: In the Bahamas, bus service is managed similarly to many taxi systems. Drivers own their own buses and collect passenger fares for their income. There is no set schedule nor set time when buses will run or arrive at a particular location. Everything depends on the driver. Bus drivers in the Bahamas are present-oriented; what they feel like doing on a particular day at a particular hour dictates what they will actually do. If the bus driver feels hungry, for example, the driver will go home to eat lunch without waiting for a preset lunch hour. Drivers see no need to repeat yesterday’s actions today, nor to set tomorrow’s schedule according to the needs and patterns of yesterday.93 As you can easily imagine, businesspeople from monochronic cultures are driven to distraction by what they perceive as the laxness of polychronic cultures, while people from polychronic cultures chafe under what they perceive as the strict regimentation of monochronic cultures. Conflicts between these two views of time occur rather easily. Let’s go back to Trompenaars’s butcher shop for an example: At my local butcher shop in Amsterdam, the butcher calls a number, unwraps, cuts, rewraps each item the customer wants, and then calls the next number.
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PEOPLE IN MONOCHRONIC CULTURES
PEOPLE IN POLYCHRONIC CULTURES
• Do one thing at a time
• Do many things at once
• Concentrate on the job
• Are highly distractible and subject to interruptions
• Take time commitments (deadlines, schedules) seriously
• Meet time commitments only if possible without extreme measures
• Are committed to the job
• Are committed to people
• Adhere scrupulously to plans
• Change plans easily and often
• Are concerned about not disturbing others (privacy is to be respected)
• Are more concerned with relationships (family, friends, business associates) than with privacy
• Show respect for private property (rarely lend or borrow things)
• Frequently borrow and lend things
• Emphasize promptness
• Vary their promptness by the relationship
• Are accustomed to short-term relationships
• Tend to build lifetime relationships.
Source: E. T. Hall & M. R. Hall, Understanding Cultural Differences (Yarmouth, ME: Intercultural Press, 1990).
Once I ventured a suggestion, “While you have the salami out, cut a pound for me, too.” Customers and staff went into shock. The system may be inefficient, but they were not about to let some wise guy change it. Researchers Edward and Mildred Hall summed up the conflicts between these different views of time by saying, “It is impossible to know how many millions of dollars have been lost in international business because monochronic and polychronic people do not understand each other or even realize that two such different time systems exist.”94 Exhibit 15.13 provides a more detailed explanation of the differences between monochronic and polychronic cultures. Differences in monochronic and polychronic time show up in four important temporal concepts that affect cross-cultural communication: appointment time, schedule time, discussion time, and acquaintance time.95 Appointment time refers to how punctual you must be when showing up for scheduled appointments or meetings. In the United States, you are considered “late” if you arrive more than five minutes after the appointed time. Swedes don’t even allow five minutes, expecting others to arrive “on the dot.” By contrast, in Latin countries, people can arrive 20 to 30 minutes after a scheduled appointment and still not be considered late. Schedule time is the time by which scheduled projects or jobs should actually be completed. In the United States and other Anglo cultures, a premium is placed on completing things on time. By contrast, more relaxed attitudes toward schedule time can be found throughout Asia and Latin America. Discussion time concerns how much time should be spent in discussion with others. In the United States, we carefully manage discussion time to avoid “wasting” time on nonbusiness topics. In Brazil, though, because of the emphasis on building relationships, as much as two hours of general discussion on nonbusiness topics can take place before moving on to business issues. Finally, acquaintance time is how much time you must spend getting to know someone before the person is prepared to do business with you. Again, in the United States, people quickly get down to business and are willing to strike a deal on the same day if the terms are good and initial impressions are positive. In the Middle East, however, it may take two or three weeks of meetings before reaching this comfort level. The French also have a different attitude toward acquaintance time. Polly Platt, author of French or Foe, a book that explains French culture and people for travelers and businesspeople, says, “Know that things are going to take longer and don’t resent it. Realize that the time system is different. Time is not a quantity for them. We save time, we spend time, we
Exhibit 15.13 Monochronic versus Polychronic Cultures
appointment time A cultural norm for how punctual you must be when showing up for scheduled appointments or meetings.
schedule time A cultural norm for the time by which scheduled projects or jobs should actually be completed.
discussion time A cultural norm for how much time should be spent in discussion with others.
acquaintance time A cultural norm for how much time you must spend getting to know someone before the person is prepared to do business with you.
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waste time; all this comes from money. The French don’t. They pass time. It’s a totally different concept.”96
Review 3: Managing One-on-One Communication One-on-one communication can be managed by choosing the right communication medium, being a good listener, giving effective feedback, and understanding cross-cultural communication. Managers generally prefer oral communication because it provides the opportunity to ask questions and assess nonverbal communication. Oral communication is best suited to complex, ambiguous, or emotionally laden topics. Written communication is best suited for delivering straightforward messages and information. Listening is important for managerial success, but most people are terrible listeners. To improve your listening skills, choose to be an active listener (clarify responses, paraphrase, and summarize) and an empathetic listener (show your desire to understand, reflect feelings). Feedback can be constructive or destructive. To be constructive, feedback must be immediate, focused on specific behaviors, and problem oriented. Finally, to increase the chances for successful cross-cultural communication, familiarize yourself with a culture’s general work norms, determine whether a culture is emotionally affective or neutral, develop respect for other cultures, and understand how address terms and attitudes toward time (polychronic versus monochronic time, and appointment, schedule, discussion, and acquaintance time) differ from culture to culture. 4
MANAGING ORGANIZATION-WIDE COMMUNICATION
Although managing one-on-one communication is important, managers must also know how to communicate effectively with a larger number of people throughout an organization. When Bill Zollars became CEO of Yellow Corporation, a trucking company, he decided that he needed to communicate directly with all 25,000 of the company’s employees, most of whom did not work at company headquarters in Overland Park, Kansas. For a year and a half, he traveled across the country conducting small, “town-hall” meetings. Zollars said, “There were days when I gave the same speech 10 times at 10 different locations. I’d start at 6:30 A.M. with the drivers, then I’d talk to the dockworkers, the people in the office, and the sales staff. At night, I’d meet with customers. I wanted as many employees and customers as possible to hear it from me face-to-face.”97 Effective leaders, however, don’t just communicate to others; they also make themselves accessible so that they can hear what employees throughout their organizations are feeling and thinking. Learn more about organization-wide communication by reading the following sections about 4.1 improving transmission by getting the message out, and 4.2 improving reception by finding ways to hear what others feel and think.
4.1 Improving Transmission: Getting the Message Out Several methods of electronic communication—email, online discussion forums, televised/videotaped speeches and conferences, corporate talk shows, and broadcast voice mail—now make it easier for managers to communicate with people throughout the organization and “get the message out.” Although we normally think of email, the transmission of messages via computers, as a means of one-on-one communication, it also plays an important role in organization-wide communication. With the click of a button, managers can send email to everyone in the company via email distribution lists. Many CEOs now use this capability regularly to keep employees up-to-date on changes and developments. Email is one of several ways that Mattel CEO Robert Eckert communicates his vision for the company:
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When I first got to Mattel, the company was in transition. In addition to spending major face time with all the senior managers, I spent hours and hours describing to all our employees and other stakeholders where we were going and how we were going to get there. I traveled and met with people, of course, but I also set up a program of regular e-mail updates, invited two-way communication, and responded personally to employee messages. Today, the company is back on track, but I’m still constantly communicating—in the elevator, in the cafeteria, on the street, on the phone, on planes, and through e-mails. And it’s always the same basic message, which is our vision for the company.98 Many CEOs and top executives make their email addresses public and encourage employees to contact them directly. Discussion forums are another means of electronically promoting organization-wide communication. Online discussion forums are the in-house online discussion forums equivalent of Internet newsgroups; by using Web- or software-based discussion The in-house equivalent of Internet tools that are available across the company, employees can easily ask questions newsgroups. By using Web- or software-based discussion tools that and share knowledge with each other. The point is to share expertise and not are available across the company, duplicate solutions already “discovered” by others in the company. Further- employees can easily ask questions more, because online discussion forums remain online, they provide a historical and share knowledge with each other. database for people who are dealing with particular problems for the first time. Online discussion forums are typically organized by topic. For example, at Ernst & Young, a major accounting firm, accountants who have questions about multinational tax analysis can simply log on to the E & Y tax forum (or dozens of other forums, too). They can either post new questions and wait for others to respond with answers or read previously posted questions and answers to see if the information they need has already been discussed. If both of these options fail, they will at least learn the names of people in the organizaExhibit 15.14 tion that they can contact for help.99 Establishing Online Discussion Exhibit 15.14 lists the steps companies need to take to establish Forums. successful online discussion forums. First, pinpoint your company’s Step 1 Step 2 Step 3 Step 4 top intellectual assets through a knowledge audit; then spread that knowledge throughout the organization. Second, create an online Discussion Reward Online directory detailing the expertise of individual workers and make it Knowledge Groups on Information Audit Directory Intranet Sharing available to all employees. Third, set up discussion groups on the intranet so that managers and workers can collaborate on problem Source: Based on G. McWilliams & M. Stepanek, “Knowledge solving. Finally, reward information sharing by making the online Management: Taming the Info Monster,” Business Week, 22 June 1998, 170. sharing of knowledge a key part of performance ratings. Televised/videotaped speeches and meetings are a third electronic method of organization-wide communication. Televised/videotaped speeches and televised/videotaped speeches meetings are simply speeches and meetings originally made to a smaller audience and meetings that are either simultaneously broadcast to other locations in the company or Speeches and meetings originally made to a smaller audience that are videotaped for subsequent distribution and viewing. After leaving Compaq either simultaneously broadcast to Computer to become CEO of WorldCom, Michael Capellas explained his 100- other locations in the company or day plan for turning around the company after a $9 billion accounting scandal. videotaped for subsequent In a one-hour internal broadcast to the company’s 60,000 employees, Capellas distribution and viewing. said, “There will be some people who are leaving the organization as a result of some of these [misstated accounting] reports.” As for turning the company around, he said, “I know it will be tough. But we have the will to win.”100 (One of his first moves was to change the company’s name to MCI.) Corporate talk shows are a variant on televised/videotaped speeches and meetings. But instead of simply being watched, corporate talk shows allow remote audi- corporate talk shows ence members, all of whom are typically workers or managers, to pose questions Televised company meetings that allow to the show’s host and guests. For example, once a month, Emma Carrasco, vice remote audiences (employees) to pose questions to the show’s host and president of marketing and communication, and Dan Hunt, president of guests. Caribbean and Latin American operations, host the Virtual Leadership Academy, which is a corporate talk show for Nortel Networks. Typically, 2,000 employees
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in 46 countries watch the live broadcast and can call in with questions about Nortel and its competitors. Why a corporate talk show? Carrasco says, “We’re always looking for ways to break down barriers in the company, and people are comfortable with the talk-show format. People watch talk shows in every country in the region, and they’ve learned that it’s okay to say what’s on their mind. In fact, it’s expected.”101 Voice messaging, or “voice mail,” is a telephone answering system that records audio messages. In one survey, 89 percent of respondents said that voice messaging is critical to business communication, 78 percent said that it improves productivity, and 58 percent said they would rather leave a message on a voice messaging system than with a receptionist.102 Nonetheless, most people are unfamiliar with the ability to broadcast voice mail by sending a recorded message to everyone in the company. Broadcast voice mail gives top managers a quick, convenient way to address their work forces via oral communication. Harry Kraemer, CEO of pharmaceutical giant Baxter International, describes Baxter’s broadcast voice mail system: “We have more than 30,000 Baxter team members hooked onto the same voice-mail system. That includes everybody but the folks on the factory line. This is hooked up in over 50 countries.” 103 At Ernst & Young, the company-wide broadcast voice mails of Chairman Phil Laskawy were so well known and well liked that E & Y employees called them “Travels with Phil.” No matter where he was traveling on business for the company—and he traveled all over the world—Phil would begin his voice mails, most of which lasted 5 to 10 minutes, with a weather report, a couple of bad jokes, and an update on his beloved New York Yankees baseball team; then came the core part of his message. 104
While working through the preparatory work for the purchase of Gillette by Procter & Gamble, it was important that both companies got their message out to employees. One way that occurred was through an external relations director at P & G whose job it is to teach Gillette employees about Procter’s corporate culture. Pictured here are A.G. Lafley (CEO of P & G) and Jim Kilts (CEO of Gillette) being interviewed about the merger.
4.2 Improving Reception: Hearing What Others Feel and Think
organizational silence When employees withhold information about organizational problems or issues.
When people think of “organization-wide” communication, they think of the CEO and top managers getting their message out to people in the company. But organization-wide communication also means finding ways to hear what people throughout the organization are feeling and thinking. This is important because most employees and managers are reluctant to share their thoughts and feelings with top managers. Surveys indicate that only 29 percent of first-level managers feel that their companies encourage employees to express their opinions openly. Another study of 22 companies found that 70 percent of the people surveyed were afraid to speak up about problems they knew existed at work. Withholding information about organizational problems or issues is called organizational silence. Organizational silence occurs when employees believe that telling management about problems won’t make a difference or that they’ll be punished or hurt in some way for sharing such information. 105 For example, after the space shuttle Columbia exploded over east Texas, the investigation board charged with determining the cause of the accident that killed all seven people on board concluded that “the NASA organizational culture had as much to do with this accident as the foam [debris that damaged the shuttle’s wing at liftoff].” How so? “Cultural traits and organizational practices detrimental to safety and reliability were allowed to develop, including . . . organizational barriers which prevented effective communication of critical safety information and stifled professional differences of opinion. . . . When they did not speak up, safety personnel could not fulfill their stated mission to provide ‘checks and balances.’”106 In short, NASA’s culture encouraged organizational silence with
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deadly consequences. Fortunately, though, company hotlines, survey feedback, frequent informal meetings, surprise visits, and blogs are ways of overcoming organizational silence. Company hotlines are phone numbers that anyone in the company can call anonymously to leave information for upper management. For example, Deloitte Touche Tohmatsu has a toll-free hotline for employees to call to report any kind of problem or issue within the company. Hotlines are particularly important because 44 percent of employees will not report misconduct. Why not? The reason is twofold: they don’t believe anything will be done, and they “fear that the report will not be kept confidential.”107 David Chillers, CEO of Ethicspoint, which runs hotlines for corporations, says that companies can expect 1 to 1.5 percent of their employees to call their hotlines and that 10 to 15 percent of the calls will involve serious problems that require immediate company action.108 Survey feedback is information that is collected by survey from organization members and then compiled, disseminated, and used to develop action plans for improvement. Many organizations make use of survey feedback by surveying their managers and employees several times a year. FedEx, for example, runs its own Survey Feedback Action program. The survey, which is administered online and is completely anonymous, includes sections for employees to evaluate their managers and the overall environment at FedEx, including benefits, incentives, and working conditions. After the surveys are completed, the results are compiled and then fed back to each FedEx work group. Each group then uses the results to decide where changes and improvements need to be made and to develop specific action plans to address those problems. The final step is to look for improvements in subsequent employee surveys to see if those plans worked. 109 Frequent, informal meetings between top managers and lower-level employees are one of the best ways for top managers to hear what others feel and think. Many people assume that top managers are at the center of everything that goes on in organizations, but top managers commonly feel isolated from most of their lower-level managers and employees. Consequently, more and more top managers are scheduling frequent, informal meetings with people throughout their companies. John Much, the CEO of HNC Software in San Diego, gets some of his best information from informal “Java with John” meetings held each week with the first 20 employees to sign up.110 Says Much, “As a leader, you need a network of people from the highest to the lowest levels who can be your trusted advisers, and who know that you are open to hearing any message, bad as well as good, that they may send you.” Michael Bonsignore, the former CEO of Honeywell, agrees, saying, “There’s no substitute for skipping down management layers and finding out what lowerlevel employees think.”111 Have you ever been around when a supervisor learns that upper management is going to be paying a visit? First, there’s shock. Next, there’s anxiety. And then there’s panic, as everyone is told to drop what he or she is doing to polish, shine, and spruce up the workplace so that it looks perfect for the visit. Of course, when visits are conducted under these conditions, top managers don’t get a realistic look at what’s going on in the company. Consequently, one of the ways to get an accurate picture is to pay surprise visits to various parts of the organization. These visits should not just be surprise inspections, but should also be used as an opportunity to encourage meaningful upward communication from those who normally don’t get a chance to communicate with upper management. Such surprise visits are part of the culture at Enterprise Rent-aCar. Fred Sorino, who manages an Enterprise office in Eatontown, New Jersey, said, “Once I was working at a branch in Cranbury, New Jersey, and a corporate vice president and a regional president showed up for a surprise visit. I was outside washing cars in 20-degree weather, and we were very busy. These
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company hotlines Phone numbers that anyone in the company can call anonymously to leave information for upper management.
survey feedback Information that is collected by surveys from organizational members and then compiled, disseminated, and used to develop action plans for improvement.
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blog A personal Web site that provides personal opinions or recommendations, news summaries, and reader comments.
two executives offered to help me clean the cars. I felt so awkward that I said I didn’t need help, but they did it anyway.” Enterprise’s then CEO Andy Taylor tells a similar story: “We were visiting an office in Berkeley and it was mobbed, so I started cleaning cars. As it was happening, I wondered if it was a good use of my time, but the effect on morale was tremendous.” 112 Blogs are another way to hear what people are thinking and saying, both inside and outside the organization. A blog is a personal Web site that provides personal opinions or recommendations, news summaries, and reader comments. At Google, which started Blogger.com, hundreds of employees are writing internal blogs. One employee even wrote a blog for posting all the notes from the brainstorming sessions used to redesign the search page used by millions each day. Staffer Marissa Mayer says, “Our legal department loves the blogs, because it basically is a written-down, backed-up, permanent time-stamped version of the scientist’s notebook. When you want to file a patent, you can now show in blogs where this idea happened.”113 External blogs, written by people outside the company, can be a good way to find out what others are saying or thinking about your organization or its products or actions. Tim Holmes, Ford’s executive director of public affairs, believes that companies have to pay attention to what is being said about them online. Says Holmes, “Like most big companies, we monitor the press, but the problem with that is it’s always retrospective, everything’s a few weeks old. The real value of searching the net, including blogs, is that you get a live picture of what people are thinking about certain issues. It means that you can predict if there is going to be an issue that’s going to grow and become something you need to respond to before it gets to the mainstream press.”114 Procter & Gamble is also turning to the Internet to do a better job of hearing what people outside the company are feeling and thinking. P&G is working with PlanetFeedback.com to find out what consumers are saying about P&G’s two biggest brands, Tide detergent and Pampers diapers. PlanetFeedback.com collects consumer comments on its Web site, from telephone hotlines, and from faxes. It will also search online message boards, discussion Web sites, Usenet user groups, and blogs to find out what people are saying about P&G’s brands.115
Review 4: Managing Organization-Wide Communication Managers need methods for managing organization-wide communication and for making themselves accessible so that they can hear what employees throughout their organizations are feeling and thinking. Email, online discussion forums, televised/videotaped speeches and conferences, corporate talk shows, and broadcast voice mail make it much easier for managers to improve message transmission and “get the message out.” By contrast, anonymous company hotlines, survey feedback, frequent informal meetings, and surprise visits help managers avoid organizational silence and improve reception by hearing what others in the organization feel and think. Monitoring internal and external blogs is another way to find out what people are saying and thinking about your organization.
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Key Terms acquaintance time, 509 active listening, 502 address terms, 507 affective cultures, 506 appointment time, 509 attribution theory, 489 blog, 514 closure, 488 coaching, 497 communication, 486 communication medium, 500 company hotlines, 513 conduit metaphor, 493 constructive feedback, 504 corporate talk shows, 511 counseling, 498 cross-cultural communication, 505
decoding, 492 defensive bias, 489 destructive feedback, 504 discussion time, 509 downward communication, 493 empathetic listening, 503 encoding, 491 feedback to sender, 492 formal communication channel, 493 fundamental attribution error, 489 hearing, 502 horizontal communication, 494 informal communication channel (“grapevine”), 495 kinesics, 498 listening, 502 monochronic cultures, 508
neutral cultures, 506 noise, 492 nonverbal communication, 498 online discussion forums, 511 organizational silence, 512 paralanguage, 499 perception, 487 perceptual filters, 487 polychronic cultures, 508 schedule time, 509 selective perception, 488 self-serving bias, 490 survey feedback, 513 televised/videotaped speeches and meetings, 511 upward communication, 494
Concept Check 1. Describe the perception process. 2. What role do perceptions (of oneself and others) play in communication problems? 3. Outline the communication process. 4. Compare formal and informal communication channels. 5. Explain the difference between coaching and counseling. 6. What types of communication media can managers use? When is it appropriate to use each medium?
7. What differentiates constructive feedback from destructive feedback? 8. How can managers increase their chances for successful cross-cultural communication? 9. How can managers best communicate with people throughout their organization? 10. Explain how managers can encourage broad-based upward communication.
Self-Assessment HOW DO YOU LISTEN? Have you ever been eager to tell someone a funny story, only to have that person interrupt you repeatedly to ask for details or clarification? And have you ever said in exasperation, “Will you just listen?” Some people prefer an inquisitive listening style, whereas others
prefer a contemplative listening style. What listening style best describes you? The Self-Assessment Appendix has a listening styles inventory on page 622. Take the 10-question survey to establish a baseline you can use as a foundation for developing your listening skills.
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Management Decision TO BLOG OR NOT TO BLOG Just this month, your company, AeroPrecision, a manufacturer of aircraft engine components, completed the upgrade of its computer system—the first upgrade in nearly 15 years.116 Everyone cheered when the DOSbased operating software was replaced with the newest Windows-based version. Now, for the first time data are being electronically collected directly from the factory floor, and the engineering, tooling, and maintenance departments are connected. You and the other top managers expect to reap terrific gains in productivity—and profitability—as a result of the upgrade. As the operations manager, you were ultimately responsible for revamping the entire system, and the process has left you motivated to adopt even more technological advances. Over the course of the upgrade, you came across several short articles and references to blogs, which you learned was short for “Web logs.” Not too savvy about these things at the time, you turned to asked your IT consultant, and she told you that blogs are Web pages that serve as publicly accessible journals. That didn’t help you much, so she directed you to a variety of blogs to find out what they were all about. After only a few visits you started thinking about creating a blog for AeroPrecision. Some managers use blogs to communicate with employees, and others use them as marketing tools to “get the message out” about their companies. The question for you is how AeroPrecision would use blogs. Only 30 of AeroPrecision’s 100 employees have computers at their desks (only 30 have desks). The rest of the employees are shop-floor workers who use the 20 terminals located on stands throughout the factory to record their personal production information. Shop-floor terminals don’t have Internet access. Could you justify connecting the 20 factory terminals to the Web? And do
you really want employees standing around the shopfloor terminals reading a company blog? But then you wonder, “Would that be any different from them hovering around the bulletin board by the time clock reading the company’s biweekly newsletter? And with a blog, the information would be more timely.” Or would it? You pause to think about the time required to maintain a blog. And what would you link out to? A public blog would need to be an authoritative voice on, well, what? You could hook up to links about aerodynamics, metal prices, and travel statistics. If you could leverage AeroPrecision’s technical expertise, you would be able to position the company as a premier provider of component parts for aircraft engines. You may even be able to convert the research you do for the blog into new customers or products for new industries. If you put your mind to it, you are confident that you can brainstorm enough valuable resources for a blog, but you come back to the issue of time. Would the time spent be worth it? Questions 1. Does it make sense for AeroPrecision to create a company blog for employees only? In other words, is a blog the best medium to get the company’s message out to employees and to hear what they feel and think? Explain. 2. Brainstorm possible items for inclusion on an AeroPrecision blog destined for public viewing. Can you think of any topics that you would want to avoid linking to? 3. How could a blog play a role in designing a company’s strategy? (Recall the issues discussed in Chapter 6, Organizational Strategy.) 4. Do you create a public blog for AeroPrecision? Why or why not?
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Management Team Decision COMMUNICATION DILEMMAS AND DECISIONS As you watch the falling snow, you can’t help thinking about the way the fax machine coughs out legal missives into a collection bin. You are a partner at Shaw Walker Theobald, a law firm with offices across the United States, and your office sits right next to the constantly humming fax machine. You’re at your wit’s end from the incessant buzzing. Documents of all lengths and levels of importance come through the fax; sometimes, a lawyer at another firm will write a question on a cover letter, send it to a lawyer at your firm by fax, and then request the answer by fax! While you pack your briefcase before heading home, you think, “What a drain on productivity! And the client ends up footing the bill. There has to be a more efficient way to communicate.” After you finish dinner, you open your work, and are again distracted—not by a fax, but by the pinging of your teenager’s instant messaging on the computer in the den. Immediately, you think you’ve hit on a solution for the office. If the firm used instant messaging, you could save the energy used by the fax, eliminate all the paper, and have answers in an instant. Communication would reach terminal speed! Unfortunately, you can’t just implement your idea when you walk in tomorrow morning. You’re only one of many partners, and they all have to approve anything that affects the management of the firm. How are you going to persuade a team of people trained to object? Instead of pulling a brief out of your bag, you flip to a clean sheet on your legal pad and begin drafting a convincing memo. GETTING STARTED This exercise will give you practice in writing memos and giving verbal feedback. You will begin by writing a memo on your own based on the scenario you just read. Then assemble a team of 5 to 6 students. Make enough copies of your memo so that each team member can have one. The job of the team is to review and critique all the memos. You will want to review Section 3.3 on giving feedback before convening the team to evaluate the memos. Choose one team member to be the moderator. The moderator will be in charge of keeping the discussion on track and ensuring that it doesn’t disintegrate into subjective attacks.
Activities 1. Write a memo to your colleagues proposing the use of instant messaging to speed communication. 2. Convene the team and critique the members’ memos. Try to use descriptive terms to give feedback about the memos. Avoid words like “good” and “bad”— they don’t give the writer any real information about the effectiveness of the memo. Here are some adjectives that you might find useful as a starting point:
• • • • • • • •
Convincing Persuasive Condescending Concise Wordy Informative Detailed Sparse
• • • • • • • •
Neat Hard to follow Clear Sloppy Off-putting Effective Inappropriate Unprofessional
Don’t limit your comment to a negative adjective, either. If you say a memo is hard to follow, explain why. What makes it hard to follow? If you say a memo is wordy, explain how it is wordy. 3. Assume that your individual proposal was accepted, and the partners (your team) have asked you to announce the new capabilities and outline the rules for their use. Determine the best way to communicate the instant messaging plan to the junior partners, associates, paralegals, and office staff. Using whatever medium you think is best, write out your communication. For example, if you think email is best, draft a relevant email. If you think a memo would be appropriate, then draft one. If you think oral communication would be a better choice, draft the speech you will give. Regardless of your medium, you will need to remember your audience. 4. If you have time, repeat the group critique session with the second communication. You may also wish to discuss as a team which medium would be the best for telling everyone at the firm about the new instant messaging initiative.
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Develop Your Career Potential I DON’T AGREE, BUT I’M LISTENING Being a good listener is a critical part of effective communication. Without it, you're unlikely to be a good manager. Therefore, the purpose of this assignment is to help you develop your listening skills. And there's no better way to do that than to talk to someone whose views are quite different from yours. In the best of situations, being a good listener is difficult. Because of perceptual filters, distractions, or daydreams, we retain only about 25 percent of what we hear. When we're talking with people who have very different views and opinions, it can be almost impossible to be good listeners. We tend to interrupt, jump to conclusions about what they'll say, and hurry them to finish their points (which we don't want to listen to anyway) so that we can “correct” their thinking with our own opinions. To complete this assignment, you'll have to find someone who has different views or opinions on some topic (handgun control, abortion, capital punishment, and euthanasia are just some of the topics on which you can always find someone with a different viewpoint). Once you've found someone, conduct a 10-minute listening session, following this simple rule: Before stating your opinion, you must first accurately reflect or paraphrase the statement that your listening partner just made (be sure to reread Subsection 3.2 on listening). For example, suppose that your listening partner says,
“Women shouldn't have to ask anyone for permission for what they do to their bodies. If they decide they want an abortion, they should go ahead and have it.” Before making your point or disagreeing with your partner's, you will have to accurately paraphrase that statement in your own words. If you don't paraphrase it correctly, your listening partner will tell you. If you or your partner has difficulty accurately paraphrasing a statement, ask the other person to repeat the statement, and try again. Also, don't parrot the statement by repeating it word for word. Good listening isn't mimicry. It's capturing the essence of what others have said in your own words. And, before your listening partner responds, he or she, too, has to accurately paraphrase what you say. Continue this listening-based discussion for 10 minutes. Questions 1. Was this discussion different from the way you normally discuss contentious topics with other people? Why or why not? 2. Was it difficult to reflect or paraphrase your listening partner's perspectives? Explain and give an example. 3. Did active listening techniques or empathetic listening techniques lead to more effective listening for you? Explain.
Take Two
Biz Flix The Paper
This engaging film shows the ethical dilemmas and stress of producing the New York Sun, a daily metropolitan newspaper. Metro Editor Henry Hackett (Michael Keaton) races against the clock to publish a story about a major police scandal that could send two young African American men to jail. He is in constant conflict with Managing Editor Alicia Clark (Glenn Close) who is more concerned about controlling the budget than about running accurate stories. Hackett is also under constant pressure from his wife Marty (Marisa Tomei), who is pregnant with their first child. While Hackett tries to get his story, Marty urges him to take a less demanding job at The Sentinel. This scene occurs early in The Paper. It shows a staff meeting that takes place the day after the Sun missed a story about a murder and other shootings with racial overtones. Instead, the Sun ran a front-page story about parking problems. At the meeting, Senior Editor Bernie White (Robert Duvall) discusses his preferences in front-page stories. What to Watch for and Ask Yourself 1. Use the model of the communication process to diagram what is occurring in the clip. 2. What types of communication do you see in the video? 3. Discuss the paralanguage used in the clip. What mood or attitude does it convey?
Management Workplace Tires Plus
Tires Plus started when Tom Gegax and Don Gullet left Royal Dutch Shell in 1976. The pair bought three gas stations, which they converted to tire stores that sold high-end tires and served cappuccino. The real competitive advantage of Tires Plus, however, was not the unique way the company delivered its service. Instead, Tom and Don thought their competitive advantage came from their employees, so they nurtured communication throughout the organization. After 25 years, Tires Plus has become a 150-store powerhouse that employs 2,000 people and generates over $200 million in annual sales. What to Watch for and Ask Yourself 1. How do the leaders of Tires Plus work to avoid perception problems? 2. What kind of communication seems to be most important at Tires Plus? Why? 3. How do Tom Gegax and Don Gullet improve one-on-one communication? 4. Describe the technique Tom uses to hear what others in the organization feel and think.
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Part 5 Controlling
CHAPTER 16
Control 522 CHAPTER 17
Managing Information 552 CHAPTER 18
Managing Service and Manufacturing Operations 582
Control
C H A P T E R
O U T L I N E
Chapter16 What Would You Do? Basics of Control 1. The Control Process 1.1 1.2 1.3 1.4 1.5
Standards Comparison to Standards Corrective Action Dynamic, Cybernetic Process Feedback, Concurrent, and Feedforward Control 1.6 Control Isn’t Always Worthwhile or Possible
How and What to Control 2. Control Methods 2.1 2.2 2.3 2.4 2.5
Bureaucratic Control Objective Control Normative Control Concertive Control Self-Control
3. What to Control? 3.1 The Balanced Scorecard
3.2 The Financial Perspective: Controlling Budgets, Cash Flows, and Economic Value Added 3.3 The Customer Perspective: Controlling Customer Defections 3.4 The Internal Perspective: Controlling Quality 3.5 The Innovation and Learning Perspective: Controlling Waste and Pollution
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise Xtra! Nine exhibit worksheets, author FAQs, quiz, Management News, and video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
Walgreen’s Headquarters, Deerfield, Illinois.1 A dollar invested in Walgreen, the drugstore company, 25 years ago is now worth 5 times as much as a dollar invested in Intel or General Electric and 15 times as much as a dollar invested in the general stock market. Except for Wal-Mart, no other Fortune 500 company has increased its sales revenues and profits every year for the last 30 years! Yet that all seemed to be forgotten at the last shareholders’ meeting where you got an earful of angry comments from shareholders upset about the company’s stock price. When you pointed out that the market would eventually raise the share price, an angry shareholder yelled, “We’re going to die before that [happens].” Well, as they say on Wall Street, “past performance is no guarantee of future performance.” In other words, despite Walgreen’s storied success, the market has hammered the company’s stock because it sees nothing but brutal competition on the horizon. For one, there’s Costco, the warehouse discounter. With its rock-bottom prices, Costco sold $1 billion of prescriptions last year, 30 percent more than the year before. For example, Costco charges $14.94 for 100 pills of fluoxetine (Prozac), which Walgreen’s sells for $37.90. For another, as always, there’s Wal-Mart, which has 3,144 stores with pharmacies. No one has Wal-Mart’s pricing power, and now that it’s thinking of opening 24-hour pharmacies (90 percent of Wal-Mart stores are already open 24 hours a day) with low prices and anytime pickup, it represents a tremendous threat. Then there’s CVS, which, after spending $2.15 billion to purchase Eckerd Drug Stores from JC Penney, is now the largest drugstore chain in the United States with nearly 6,000 stores. And with the purchase of Eckerd, CVS now owns over 1,000 stores in two of Walgreen’s key markets, Florida and Texas, which are home to millions of elderly customers who have retired to plentiful sunshine and warm weather. The biggest threat to Walgreen, however, wasn’t even on its radar screen three years ago, and that’s mail-order pharmacies run by pharmacy benefit managers (PBMs). PBMs work with employers, insurers, and health maintenance organizations (HMOs) to drive down prescription drug costs, which have been rising 10 to 15
What Would You Do?
percent a year. To contain costs, PBMs fill prescriptions for 90 days instead of the traditional 30 days. As a result, an average prescription costs $2.50 to fill compared to over $5.00 at a typical drugstore. Furthermore, PBMs don’t need to buy real estate, build stores, advertise, or hire thousands of employees—costs that Walgreen can’t avoid at its more than 5,000 stores. With companies’ health-care costs increasing by 13 percent per year and a widely cited government study claiming that PBM prices are 27 percent lower for brand-name drugs and 53 percent lower for generic drugs, it’s no wonder that companies like General Motors are requiring their employees to order their maintenance drugs (drugs taken for more than three months) from PBMs, and not Walgreen. Since PBM sales are increasing by 18 percent per year, double the growth rate of traditional drugstores’ sales, and since Walgreen gets 62 percent of its $40 billion in revenues from prescriptions, the threat from PBMs isn’t trivial. And, when people aren’t picking up prescriptions at Walgreen’s drugstore, they’re not buying the nonprescription goods such as makeup and STUDY TIP diapers that account for 33 perThe list of key terms on page cent of Walgreen’s sales. 547 can be a valuable study Well, the problems are aid. Write down the definition clear, but solving them won’t be easy. First, how can we conof each term on a separate trol costs? Next, in retail, the piece of paper without conkey statistic is “same store sulting the margin terms in sales,” that is, whether the the chapter. Cement your unsame store’s sales are up or derstanding by also writing down compared to last year. With all of these threats, how an example if possible. can Walgreen continue to grow same store sales? If we don’t, the stock price will never recover. Finally, what can we do about the threat of PBMs and mail-order prescriptions? Our long-term survival depends on figuring this out. If you were in charge at Walgreen, what would you do?
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control A regulatory process of establishing standards to achieve organizational goals, comparing actual performance against the standards, and taking corrective action, when necessary.
As Walgreen’s situation shows, past success is no guarantee of future success. Even successful companies fall short, face challenges, and have to make changes. Control is a regulatory process of establishing standards to achieve organizational goals, comparing actual performance against the standards, and taking corrective action when necessary, as at Walgreen’s, to restore performance to those standards. Control is achieved when behavior and work procedures conform to standards and company goals are accomplished.2 Control is not just an after-the-fact process, however. Preventive measures are also a form of control. We begin this chapter by examining the basic control process used in organizations. In the second part of the chapter, we go beyond the basics to an in-depth examination of the different methods that companies use to achieve control. We conclude the chapter by looking at the things that companies choose to control (i.e., finances, customer retention, product quality, etc.).
Basics of Control With many empty stores and a dated look, the Coventry Mall in Pottstown, Pennsylvania, just 22 miles from the gigantic King of Prussia Mall, was dying, but mall manager Rene Daniel has it on the mend. The first step was fixing the food. With the mall down to just six food vendors (e.g., Hot Dogs & More and Egg Roll Hut), he convinced McDonald’s, Subway, and Saladworks to open restaurants. When the lease expired on the “Everything 99 Cent” store, he convinced Gap to lease the adjacent space, knock out the wall, and replace the aging blue Formica with blond wood and modern glass. Changes like this have increased mall sales by a third to above the national average. Nevertheless, despite the changes, Vickey Sihler, who started shopping at the Coventry Mall again because of Gap and the new Children’s Place store, still sees room for improvement. “This place really needs to be fixed up,”she says.3 So, by working the control process (standards, comparison to standards, and corrective action), Rene Daniel is slowly but surely fixing Coventry Mall. 1
1
After reading the next section, you should be able to describe the basic control process.
THE CONTROL PROCESS
The basic control process 1.1 begins with the establishment of clear standards of performance, 1.2 involves a comparison of performance to those standards, 1.3 takes corrective action, if needed, to repair performance deficiencies, 1.4 is a dynamic, cybernetic process, 1.5 consists of three basic methods: feedback control, concurrent control, and feedforward control. However, as much as managers would like, 1.6 control isn’t always worthwhile or possible.
1.1 Standards
standards A basis of comparison for measuring the extent to which various kinds of organizational performance are satisfactory or unsatisfactory.
The control process begins when managers set goals, such as satisfying 90 percent of customers or increasing sales by 5 percent. Companies then specify the performance standards that must be met to accomplish those goals. Standards are a basis of comparison for measuring the extent to which organizational performance is satisfactory or unsatisfactory. For example, many pizzerias use 30 minutes as the standard for delivery times. Since anything longer is viewed as unsatisfactory, they’ll typically reduce the price if they can’t deliver a hot pizza to you in 30 minutes or less. So how do managers set standards? How do they decide which levels of performance are satisfactory and which are unsatisfactory? The first criterion for a good standard is that it must enable goal achievement. If you’re meeting
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the standard, but still not achieving company goals, then the standard may have to be changed. For example, hospital patients are typically billed a month or two after treatment. But, with the amount of unreimbursed care totaling $22.3 billion nationwide, many hospitals are changing payment standards by asking that insurance copayments be paid before the patient leaves the hospital. Anyone who can’t afford the entire copayment at once is asked to at least make a down payment (those who do are much more likely to pay their entire bill). Karen Dostart, at Marshal Medical Center in Placerville, California, says, “My goal is to reduce elective services that go to bad debt by 50 percent within a year.”4 Companies also determine standards by listening to customers or observing competitors. After hearing from consumers that they were interested in machines that would automate routine household tasks, iRobot, a manufacturer of industrial and government (military) robots, created the Scooba, a robot that washes floors. Founder Colin Angle says, “People just hated to mop, so we saw a real opportunity.”5 The Scooba vacuums up dirt and debris, sprays a bleach cleaning solution, and then squeegees and sucks up the dirty water from the floor. At about $250, the Scooba can mop a typical kitchen in 45 minutes. Standards can also be determined by benchmarking other companies. Benchmarking is the process of determining how well other companies (though not just competitors) perform business functions or tasks. In other words, benchmarking is the process of determining other companies’ standards. When setting standards by benchmarking, the first step is to determine what to benchmark. Companies can benchmark anything, from cycle time (how fast) to quality (how well) to price (how much). The next step is to identify the companies against which to benchmark your standards. The last step is to collect data to determine other companies’ performance standards. Cadillac sales dropped for three straight decades because car buyers saw Cadillacs as big, bloated, poor-quality, luxury cars. Then, several years ago, after losing most of its luxury car market share, Cadillac began systematically benchmarking its quality and driving performance against Mercedes, BMW, Audi, and Lexus cars. Because of the changes made as a result of that benchmarking, Cadillac’s STS sedan is now giving those luxury automakers’ cars a run for their money. The Wall Street Journal concluded, “We’d have been impressed if the STS had matched these European cars’ performance, but what surprised us was that in some ways it was better. The STS felt more nimble and fun to drive than heavier-feeling models including the Mercedes E-Class or Audi A6. It kept us feeling connected to the road, while a Lexus LS430 left us feeling isolated. And up against BMW’s 5 Series, considered the benchmark in the class? We’d call it a draw.”6
1.2 Comparison to Standards The next step in the control process is to compare actual performance to performance standards. Although this sounds straightforward, the quality of the comparison largely depends on the measurement and information systems a company uses to keep track of performance. The better the system, the easier it is for companies to track their progress and identify problems that need to be fixed. One way for retailers to verify that performance standards are being met is to use “secret shoppers.” Retail stores spend $600 million a year to hire these consultants, who visit the stores pretending to be customers, to determine whether employees provide helpful customer service. The “secret shoppers” make detailed observations of the service provided (or not). Secret shopper Cliff Fill recalls the fast-food restaurant where the workers discussed their dating plans as he stood in front of them ready to order. After ignoring him for 90 seconds (secret shoppers often carry timers with them), they turned to him and said, “We’ll be done with our conversation in a minute and be with you.”7 Mystery shoppers also note great service. Mike Bare, cofounder of the Mystery Shoppers Providers Association, says, “It used to be about catching people
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benchmarking The process of identifying outstanding practices, processes, and standards in other companies and adapting them to your company.
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doing something wrong. But, more and more, it’s validating people who do things right.”8 Indeed, Intrawest, a ski resort, gives $100 bills to employees praised in its secret shopper reports.
1.3 Corrective Action The next step in the control process is to identify performance deviations, analyze those deviations, and then develop and implement programs to correct them. This is similar to the planning process discussed in Chapter 5: regular, frequent performance feedback allows workers and managers to track their performance and make adjustments in effort, direction, and strategies. For example, Microsoft uses a program called Dr. Watson to generate feedback whenever something goes wrong on your Windows-based computer. You’ve probably seen it at one time or another. Something freezes up on your computer, and a dialogue box pops up, asking if you want to send a report to Microsoft so that it can use your information, along with information from others’ computers, to figure out what went wrong. Microsoft used a version of Dr. Watson when developing its latest version of Microsoft Office software. Beta copies of Office went out to 600,000 testers, and the Dr. Watson feedback generated from problems they experienced prompted Microsoft to spend an additional three months eliminating bugs from the software before releasing an official version for sale.9
1.4 Dynamic, Cybernetic Process As shown in Exhibit 16.1, control is a continuous, dynamic, cybernetic process. It begins by setting standards, measuring performance, and then comparing performance to the standards. If the performance deviates from the standards, then managers and employees analyze the deviations and develop and implement corrective programs that (hopefully) achieve the desired performance by meeting the standards. Managers must repeat the entire process again and again in an endless feedback loop (a continuous process). Thus, control is not a onetime achievement or result. It continues over time (i.e., it is dynamic) and requires cybernetic daily, weekly, and monthly attention from managers to maintain performance The process of steering or levels at the standard (i.e., it is cybernetic). Cybernetic derives from the Greek keeping on course. word kubernetes, meaning “steersman,” that is, one who steers or keeps on course.10 Therefore, the control process shown in Exhibit 16.1 is cybernetic Exhibit 16.1 because of the feedback loop in which actual performance is compared to Cybernetic Control Process standards so that deviations from those standards can be minimized or corrected. Set Standards Keeping control of business expenses is an example of a continuous, dynamic, cybernetic process. A company that doesn’t closely monitor expenses usually finds that they quickly get out of control, even for the smallest things. For example, when Sandy Weill became Measure Develop & the new CEO of Commercial Credit in Baltimore, everywhere he Performance Implement Program for looked, he saw expenses that could be cut. When he saw stacks of Corrective “free” copies of the Wall Street Journal in the lobby, he proclaimed, Action “Cancel all subscriptions. If employees want a Wall Street Journal, Compare with tell them ‘pay for it yourself.’” After seeing a plant-service contracStandards tor water the potted plants outside his office, he said, “No more watering plants.” Instead, he told the closest secretary, “Water your plant yourself.” Turning next to company cars, he fired off a memo Analyze Identify stating, “You have three days to do one of the following: (1) turn in Deviations Deviations your company car, or (2) deliver a certified check for the fair-market value of your company car.” When the head of personnel, whose Source: H. Koontz & R. W. Bradspies, “Managing through Feedforcompany car was a Mercedes, complained, Weill said, “We don’t ward Control: A Future-Directed View,” Business Horizons, June give cars. We don’t give memberships to clubs. If people make 1972, 25–36. Reprinted with permission from Business Horizons, © 1972 by the Trustees at Indiana University, Kelley School of Business. enough money, they can live whatever lifestyle they want.”11
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Sure, it’s a cliché, but it’s just as true in business as in sports: If you take your eye off the ball, you’re going to strike out. Control is an ongoing, dynamic, cybernetic process.
1.5 Feedback, Concurrent, and Feedforward Control There are three basic control methods: feedback control, concurrent control, and feedforward control.12 Feedback control is a mechanism for gathering information about performance deficiencies after they occur. This information is then used to correct or prevent performance deficiencies. Study after study has clearly shown that feedback improves both individual and organizational performance. In most instances, any feedback is better than no feedback. If there is a downside to feedback, however, it is that it sometimes occurs too late. For example, 90 percent of the time an electrical transformer malfunctions on a neighborhood utility pole, a squirrel caused the problem. Unfortunately, electrical utilities have had little success keeping squirrels away from their equipment. In general, utilities like Pepco Holdings in Washington, D.C., which experiences nearly a thousand squirrel-related outages a year, don’t find out about the problem until after a squirrel stands atop a utility pole, touches a live wire, and fries itself and the transformer, creating a huge power surge that blows out computers, televisions, and appliances in nearby homes. Power goes out in the neighborhood and customer complaints pour in with no advance warning. Sheila Frazier, a senior project manager for Energy Consulting Group LLC of Marietta, Georgia, says, “You’ve got to drive forever to some place, replace the transformer—and the worst problem is you know in your heart it’s a squirrel, but you don’t often have a fried carcass to show anybody because predators have already snatched it, and customers are crying bloody murder.”13 Concurrent control is a mechanism for gathering information about performance deficiencies as they occur. Thus, it is an improvement over feedback because it attempts to eliminate or shorten the delay between performance and feedback about the performance. Aircraft manufacturers have recognized the importance of providing flight crews and maintenance personnel with more information about how their jets are running. Consequently, new-generation planes contain hundreds of computer sensors that airlines can use to monitor an airplane’s systems while it is in flight. For instance, according to Lou Mancini, vice president of maintenance services for Boeing’s Commercial Airplane Group, Boeing’s Airplane Health Management service “is designed to increase the airplane’s availability, since the carrier will be able to identify a problem [while the flight is in the air] and be prepared to fix it, as soon as the airplane arrives at the gate.”14 Feedforward control is a mechanism for gathering information about performance deficiencies before they occur. In contrast to feedback and concurrent control, which provide feedback on the basis of outcomes and results, feedforward control provides information about performance deficiencies by monitoring inputs, not outputs. Thus, feedforward control seeks to prevent or minimize performance deficiencies before they happen. In addition to using the Dr. Watson tool on your computer to provide feedback after customers have experienced problems on their computers, Microsoft also uses feedforward controls to try to prevent software problems before they occur. For example, when developing the latest version of its Windows Server software (for network and Internet computer servers), Microsoft taught 8,500 experienced programmers new methods for writing more reliable software code before asking them to develop new features for Windows Server software. Microsoft has also developed new software testing tools that let the programmers thoroughly test the code they’ve written (i.e., input) before passing the code on to others to be used in beta testing and then in final products.15 Exhibit 16.2 lists guidelines that companies can follow to get the most out of feedforward control.
feedback control A mechanism for gathering information about performance deficiencies after they occur.
concurrent control A mechanism for gathering information about performance deficiencies as they occur, thereby eliminating or shortening the delay between performance and feedback.
feedforward control A mechanism for monitoring performance inputs rather than outputs to prevent or minimize performance deficiencies before they occur.
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1.6 Control Isn’t Always Worthwhile or Possible
1. Thorough planning and analysis are required. 2. Careful discrimination must be applied in selecting input variables.
CHARLES RIVER LABORATORIES
Control is achieved when behavior and work procedures conform to standards and goals are accomplished. By contrast, control loss occurs when behavior 3. The feedforward system must be kept dynamic. and work procedures do not conform to standards.16 4 A model of the control system should be developed. John Caudwell, owner of Phones4U, one of the 5. Data on input variables must be regularly collected. United Kingdom’s largest mobile phone chains, felt 6. Data on input variables must be regularly assessed. that his company had control loss with respect to email. Managers and employees were averaging three 7. Feedforward control requires action. hours per day on email and, according to Caudwell, Source: H. Koontz & R. W. Bradspies, “Managing through Feedforward Control: A Future Directed View,” Business Horizons, June 1972, 25–36. Reprinted with permission from not spending enough time with customers. So he comBusiness Horizons, © 1972 by the Trustees at Indiana University, Kelley School of Business. pletely banned email: “The policy came from me. The Exhibit 16.2 staff was initially slightly shocked that I should make such a revolutionary Guidelines for Using Feedforward move.” Said Caudwell, “We have email paralysis. If you have a cancer, you have Control to cut it out. That’s what I’ve done.”17 Maintaining control is important because control loss prevents goal achievecontrol loss ment (in the Phones4U example, not spending enough time with customers). A situation in which behavior When control loss occurs managers need to find out what, if anything, they could and work procedures do not have done to prevent it. Usually, as discussed above, that means identifying deviconform to standards. ations from standard performance, analyzing the causes of those deviations, and taking corrective action. Implementing controls, however, isn’t always worthwhile or possible. For example, it’s debatable whether, in the long run, Phones4U’s email ban is a net plus for the company. Indeed, Tanno Massar, director of media relations at TPG, a logistics company, said, “It would be a serious setback for the company if we could no longer use email, and we are not considering it.”18 Let’s look at regulation costs and cybernetic feasibility to see why implementing controls isn’t always worthwhile or possible. To determine whether control is worthwhile, managers need to carefully asregulation costs sess regulation costs, that is, whether the costs and unintended consequences of The costs associated with control exceed its benefits. For example, one of the reasons the number of U.S. implementing or maintaining control. pharmaceutical companies producing major vaccines has dropped significantly is that the cost of controlling legal risk (through liability insurance and in-house legal staffs) is so high. In the 1960s, 37 U.S. companies produced 380 licensed vaccines. In 1984, 15 U.S. companies produced 88 licensed vaccines. Today, Increasing regulation costs are because of legal costs, just 5 U.S. companies produce vaccines.19 As a result, forcing the pharmaceutical industry parents and doctors have faced severe shortages in 8 of the 11 recommended to outsource vaccine development. vaccines that prevent children from contracting diseases like diphtheria, Charles River Laboratories is one of 20 only a handful of companies that tetanus, whooping cough, measles, mumps, rubella, and chicken pox. Before supply pathogen-free eggs required choosing to implement control, managers should be confident that the benefits for vaccine development and exceed the costs. production. An often-overlooked factor in determining the cost of control is that unintended consequences sometimes accompany increased control. Control systems help companies, managers, and workers accomplish their goals, but at the same time that control systems help solve some problems, they can create others. HewlettPackard became the market leader by manufacturing high-quality, reliable computer printers. But, as competition grew and prices dropped, H-P printers grew relatively more expensive for consumers, and H-P began losing market share. The problem was that H-P, where product quality and functionality always came first, was overengineering its printers. They were too expensive because they were made too well. To convince H-P’s computer engineers that this was the problem, manager Tom Alexander put
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a $150 H-P printer on a conference table and then stood on top of it. His point? Consumers want printers that print, so don’t add unnecessary costs by making them strong enough to use as step stools.21 Another factor to consider is cybernetic feasibility, the extent to which it is possible to implement each step in the control process: clear standards of performance, comparison of performance to standards, and corrective action. If one or more steps cannot be implemented, then maintaining effective control may be difficult or impossible. For example, many retail companies provide significant employee discounts, which can be used by entering special codes at the company’s online store. However, those codes, meant for employee use, have leaked out via email to nonemployees and are also published at Web sites such as http://www.quicktoclick.com. Amy Krasuna doesn’t work for Old Navy or Banana Republic, but she has the employee codes for each company. Says Krasuna, “I’m being bombarded with them.”22 Is it possible to control these discounts so that only employess can use them? Yes, with sufficient money, technical expertise, and the proper software tools (i.e., the cost of control), online retailers can create unique online discount codes that only work once and email them to employees. A spokesperson for Gap, which uses such codes, said, “We want to make sure we’re protecting the integrity of the [sales] event. We really consider it a benefit to our employees.” However, at Banana Republic, which ironically is owned by Gap, a spokesperson said that “technological challenges” prevented the company from using unique onetime codes. As a result, Banana Republic’s 25 percent employee discount was being widely used by people who aren’t employees like Amy Krasuna.
Review 1: The Control Process The control process begins by setting standards, measuring performance, and then comparing performance to the standards. The better a company’s information and measurement systems, the easier it is to make these comparisons. The control process continues by identifying and analyzing performance deviations, and then developing and implementing programs for corrective action. However, control is a continuous, dynamic, cybernetic process, not a onetime achievement or result. Control requires frequent managerial attention. The three basic control methods are feedback control (after-the-fact performance information), concurrent control (simultaneous performance information), and feedforward control (preventive performance information). Control, however, has regulation costs and unanticipated consequences and therefore isn’t always worthwhile or possible.
How and What to Control At about 10 percent of Sam’s Club and Wal-Mart stores, midnight shift employees are locked in to keep out robbers and, some say, also to prevent employee theft. According to Mona Williams, Wal-Mart’s vice president for communications, “Wal-Mart secures these stores just as any other business does that has employees working overnight. Doors are locked to protect associates and the store from intruders.”23 But many employees dislike the policy. When Michael Rodriguez injured his ankle at 3 A.M., he had to wait an hour for a store manager to show up to unlock the doors. Said Rodriguez, “Being locked in in an emergency like that, that’s not right.”24 Wal-Mart’s Mona Williams responded, “Fire doors are always accessible [and unlocked from the inside] for safety, and there will always be at least one manager in the store with a set of keys to unlock the doors.”25 If you managed a Wal-Mart store, would you lock in your midnight employees? Would doing so jeopardize or improve their safety? Kmart, Sears,
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cybernetic feasibility The extent to which it is possible to implement each step in the control process.
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Home Depot, and Costco don’t lock in their employees, so is Wal-Mart being overly restrictive? Or is this policy a reasonable response to employee theft, which can often exceed a store’s profits? Former Sam’s Club manager Tom Lewis says of the lock-in practice, “They’re concerned about the bottom line, and the bottom line is affected by shrinkage in the store.”26 If you were a Wal-Mart or Sam’s Club store manager, what would you do? 2 3
2
After reading the next two sections, you should be able to discuss the various methods that managers can use to maintain control. describe the behaviors, processes, and outcomes that today’s managers are choosing to control in their organizations.
CONTROL METHODS
Managers can use five different methods to achieve control in their organizations: 2.1 bureaucratic, 2.2 objective, 2.3 normative, 2.4 concertive, and 2.5 self-control.
2.1 Bureaucratic Control bureaucratic control The use of hierarchical authority to influence employee behavior by rewarding or punishing employees for compliance or noncompliance with organizational policies, rules, and procedures.
When most people think of managerial control, what they have in mind is bureaucratic control. Bureaucratic control is top-down control, in which managers try to influence employee behavior by rewarding or punishing employees for compliance or noncompliance with organizational policies, rules, and procedures. Most employees, however, would argue that bureaucratic managers emphasize punishment for noncompliance much more than rewards for compliance. For instance, when visiting the company’s regional offices and managers, the president of a training company, who was known for his temper and for micromanaging others, would get some toilet paper from the restrooms and aggressively ask, “What’s this?” When the managers answered, “Toilet paper,” he would scream that it was two-ply toilet paper that the company couldn’t afford. When told of a cracked toilet seat in one of the women’s restrooms, he said, “If you don’t like sitting on that seat, you can stand up like I do!”27 Ironically, bureaucratic management and control were created to prevent just this type of managerial behavior. By encouraging managers to apply wellthought-out rules, policies, and procedures in an impartial, consistent manner to everyone in the organization, bureaucratic control is supposed to make companies more efficient, effective, and fair. Perversely, it frequently has just the opposite effect. Managers who use bureaucratic control often emphasize following the rules above all else. When an employee collapsed from chest pains, her boss, fearing a heart attack, helped carry her to an ambulance. Yet, when the employee was thankfully diagnosed with indigestion and not a heart attack and returned to work several hours later, her boss filed a disciplinary action accusing her of an unexcused absence. Employees complained to the company CEO, who then took steps to correct the situation. The boss subsequently apologized to the employee and to his entire 25-person staff, explaining that he was wrong for taking the company’s absence policy “too literally.”28 Another characteristic of bureaucratically controlled companies is that due to their rule- and policy-driven decision making, they are highly resistant to change and slow to respond to customers and competitors. Recall from Chapter 2 that even Max Weber, the German philosopher who is largely credited with popularizing bureaucratic ideals in the late nineteenth century, referred to bureaucracy as the “iron cage.” He said, “Once fully established, bureaucracy is among those social structures which are the hardest to destroy.”29 Of course, the national government, with hundreds of bureaus, agencies, and departments, is typically the largest bureaucracy in most countries. In the United States, because of the thousands of career bureaucrats who staff the offices of the
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federal government, even presidents and Congress have difficulty making changes. When General Dwight Eisenhower became president after Harry Truman, Truman, who as president had dealt with government bureaucracies, quipped, “Poor Ike. It won’t be a bit like the army. He’ll sit here and he’ll say, ‘Do this, do that,’ and nothing will happen.”30
2.2 Objective Control
DO
In many companies, bureaucratic control has evolved into objective control, objective control which is the use of observable measures of employee behavior or output to The use of observable measures of assess performance and influence behavior. Whereas bureaucratic control worker behavior or outputs to assess performance and influence behavior. focuses on whether policies and rules are followed, objective control focuses on the observation or measurement of worker behavior or output. For example, behavior control determining whether sales representatives filed expense reports within 30 days, Regulation of the behaviors and as specified by company policy, is an example of bureaucratic control, while actions that workers perform measuring whether they met their sales quotas or returned phone calls in a on the job. timely manner is an example of objective control. There are two kinds of objective control: behavior control and output control. Behavior control is regulating behaviors and actions that workers perform on the job. The basic assumption of behavior DON’T CHEAT ON TRAVEL EXPENSE control is that if you do the right things (i.e., the right behavREPORTS iors) every day, then those things should lead to goal achieveWorkers are often tempted to pad their travel ment. Behavior control is still management-based, however, expense reports. As one put it, “After a while which means that managers are responsible for monitoring and you feel that they owe it to ya, so the hell rewarding or punishing workers for exhibiting desired or with ‘em. I’m going to expense it.” Frank undesired behaviors. Companies that use global positioning Navran of the Ethics Resource Center says that people justify this by telling themsatellite (GPS) technology to track where workers are and what selves, “I’m not really stealing from the comthey’re doing are using behavior control. For example, after pany—I’m just getting back what I feel I’m getting complaints that his police officers weren’t always on the entitled to.” However, Joel Richards, execujob, Sergeant John Kuczynsky quietly put GPS tracking devices tive vice president and chief administrative in his officers’ cars. Contrary to the officers’ reports indicating officer of El Paso Corporation, says, “You that they were patrolling streets or using radar to catch speedlearn a lot about people from their expense ing drivers, the GPS tracking software soon showed that five reports. If you can’t trust an employee to be officers were sitting for long periods in parking lots or taking truthful on an expense report, if you can’t long breaks for meals. All five are now barred from law trust them with small dollars, how can you enforcement jobs.32 Likewise, some organizations, worried that trust them with making decisions involving employees are wasting time on nonproductive behaviors, are millions of dollars?” So, do the right thing, don’t cheat on your travel expense reports.31 removing Solitaire and Mine Sweeper games from employees’ computers. The reason? Researchers at the Internal Revenue Service have found that half the time IRS employees are using computers they’re playing games, gambling, or shopping on the Internet.33 Instead of measuring what managers and workers do, output control mea- output control sures the results of their efforts. Whereas behavior control regulates, guides, Regulation of workers’ results or outand measures how workers behave on the job, output control gives managers puts through rewards and incentives. and workers the freedom to behave as they see fit as long as they accomplish prespecified, measurable results. Output control is often coupled with rewards and incentives. Three things must occur for output control and rewards to lead to improved business results. First, output control measures must be reliable, fair, and accurate. Second, employees and managers must believe that they can produce the desired results. If they don’t, then the output controls won’t affect their behavior. Third, the rewards or incentives tied to outcome control measures must truly be dependent on achieving established standards of performance. For example, Smithfield Foods CEO Joseph Luter doesn’t earn a bonus unless pretax profits exceed $100 million. Ray Goldberg, chairman of the company’s compensation committee, says that the performance requirements shouldn’t “be so low that you get a bonus no matter what you do.”34 Goldberg explains,
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“We were trying to make sure [Mr. Luter’s] rewards are based on the ups and downs of the company.”35 So, with pretax profits of $227.1 million, Luter’s bonus, based on 2 percent of earnings between $100 million and $300 million, and 3 percent of profits over $300 million, would total $2.5 million. For output control to work with rewards, the rewards must truly be at risk if performance doesn’t measure up.
2.3 Normative Control
normative control Regulation of workers’ behavior and decisions through widely shared organizational values and beliefs.
Rather than monitoring rules, behavior, or output, another way to control what goes on in organizations is to use normative control to shape the beliefs and values of the people who work there. With normative controls, a company’s widely shared values and beliefs guide workers’ behavior and decisions. For example, at Nordstrom, a Seattle-based department store chain, one value permeates the entire work force from top to bottom: extraordinary customer service. On the first day of work at Nordstrom, trainees begin their transformation to the “Nordstrom way” by reading the employee handbook. Sounds boring, doesn’t it? But Nordstrom’s handbook is printed on one side of a 3-by-5-inch note card. In its entirety, it reads: Welcome to Nordstrom’s. We’re glad to have you with our company. Our Number One goal is to provide outstanding customer service. Set both your personal and professional goals high. We have great confidence in your ability to achieve them. Nordstrom Rules: Rule #1: Use your good judgment in all situations. There will be no additional rules. Please feel free to ask your department manager, store manager or division general manager any question at any time.36
GETTY IMAGES
Nordstrom sets the retailing industry’s benchmark for customer service by using normative control. Here an employee is helping customers in Nordstrom’s Costa Mesa, California store.
That’s it. No lengthy rules. No specifics about what behavior is or is not appropriate. Use your judgment.37 Normative controls are created in two ways. First, companies that use normative controls are very careful about whom they hire. While many companies screen potential applicants on the basis of their abilities, normatively controlled companies are just as likely to screen potential applicants based on their attitudes and values. For example, before building stores in a new city, Nordstrom sends its human resource team into town to interview prospective applicants. In a few cities, the company canceled its expansion plans when it could not find enough qualified applicants who embodied the service attitudes and values for which Nordstrom is known. Nordstrom would rather give up potential sales in lucrative markets than do business using people who cannot provide Nordstrom’s level of service.38 Second, with normative controls, managers and employees learn what they should and should not do by observing experienced employees and by listening to the stories they tell about the company. At Nordstrom, many of these stories, which employees call “heroics,” have been inspired by the company motto, “Respond to Unreasonable Customer Requests!”39 “Nordies,” as Nordstrom employees call themselves, like to tell the story about a customer who just had to have a pair of burgundy Donna Karan slacks that had gone on sale, but she could not find her size. The sales associate, who was helping her, contacted five nearby Nordstrom stores, but none had the customer’s size. So rather than leave the customer dissatisfied with her shopping experience, the sales associate went to her manager for petty cash and then went across the street and paid full price for the slacks at a competitor’s store. She then resold them to the
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customer at Nordstrom’s lower sale price.40 Obviously, Nordstrom would quickly go out of business if this were the norm. Nevertheless, this story makes clear the attitude that drives employee performance at Nordstrom in ways that rules, behavioral guidelines, or output controls could not.
2.4 Concertive Control Whereas normative controls are based on beliefs that are strongly held and widely shared throughout a company, concertive controls are based on beliefs that are shaped and negotiated by work groups.41 Whereas normative controls are driven by strong organizational cultures, concertive controls usually arise when companies give autonomous work groups complete autonomy and responsibility for task completion (see Chapter 10, Managing Teams, for a complete discussion of the role of autonomy in teams and groups). The most autonomous groups operate without managers and are completely responsible for controlling work group processes, outputs, and behavior. Such groups do their own hiring, firing, worker discipline, work schedules, materials ordering, budget making and meeting, and decision making. Concertive control is not established overnight. Highly autonomous work groups evolve through two phases as they develop concertive control. In phase one, group members learn to work with each other, supervise each other’s work, and develop the values and beliefs that will guide and control their behavior. And, because they develop these values and beliefs themselves, work group members feel strongly about following them. For example, a member of an autonomous team at ISE Electronics, a small manufacturer of electronic boards, said, “I feel bad, believe it or not. Last Friday, we missed a shipment. I feel like I missed the shipment since I’m the last person that sees what goes to ship. But Friday we missed the shipment by two boards and it shouldn’t have been missed. But it was and I felt bad because it’s me. It’s a reflection on me, too, for not getting the boards out the door.”42 Another member of the same team said, “Under the old system [managementled bureaucratic control], who gave a hoot if the boards shipped today or not? We just did our jobs. Now, we have more buy-in by the team members. We feel more personal responsibility for the product.”43 The second phase in the development of concertive control is the emergence and formalization of objective rules to guide and control behavior. The beliefs and values developed in phase one usually develop into more objective rules as new members join teams. The clearer those rules, the easier it becomes for new members to figure out how and how not to behave. For example, a team member at ISE Electronics described how the team dealt with members who showed up late to work: “Well, we had some disciplinary thing, you know. We had a few certain people who didn’t show up on time and made a habit of coming in late. So the team got together and kinda set some guidelines and we told them, you know, ‘If you come in late the third time and you don’t wanna do anything to correct it, you’re gone.’ That was a team decision that this was a guideline that we were gonna follow.”44 Again, the key difference in concertive control is that the teams—and not management—enforce these rules. Ironically, concertive control may lead to even more stress for workers to conform to expectations than bureaucratic control. Under bureaucratic control, most workers only have to worry about pleasing the boss. But with concertive control, their behavior has to satisfy the rest of their team members. For example, one team member said, “I don’t have to sit there and look for the boss to be around; and if the boss is not around, I can sit there and talk to my neighbor or do what I want. Now the whole team is around me and the whole team is observing what I’m doing.”45 Plus, with concertive control, team members have a second, much more stressful role to perform—that of making sure that their team members adhere to team values and rules.
concertive control Regulation of workers’ behavior and decisions through work group values and beliefs.
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2.5 Self-Control self-control (self-management)
Self-control, also known as self-management, is a control system in which man-
A control system in which managers and workers control their own behavior by setting their own goals, monitoring their own progress, and rewarding themselves for goal achievement.
agers and workers control their own behavior.46 Self-control does not result in anarchy in which everyone gets to do whatever he or she wants. In self-control or self-management, leaders and managers provide workers with clear boundaries within which they may guide and control their own goals and behaviors.47 Leaders and managers also contribute to self-control by teaching others the skills they need to maximize and monitor their own work effectiveness. In turn, individuals who manage and lead themselves establish self-control by setting their own goals, monitoring their own progress, rewarding or punishing themselves for achieving or for not achieving their self-set goals, and constructing positive thought patterns that remind them of the importance of their goals and their ability to accomplish them.48 For example, let’s assume you need to do a better job of praising and recognizing the good work that your staff does for you. You can use goal setting, selfobservation, and self-reward to self-manage this behavior. For self-observation, write “praise/recognition” on a 3-by-5-inch card. Put the card in your pocket. Put a check on the card each time you praise or recognize someone (wait until the person has left before you do this). Keep track for a week. This serves as your baseline or starting point. Simply keeping track will probably increase how often you do this. After a week, assess your baseline or starting point, and then set a specific goal. For instance, if your baseline was twice a day, you might set a specific goal to praise or recognize others’ work five times a day. Continue monitoring your performance with your cards. Once you’ve achieved your goal every day for a week, give yourself a reward (perhaps a CD, a movie, lunch with a friend at a new restaurant) for achieving your goal.49 As you can see, the components of self-management, self-set goals, selfobservation, and self-reward have their roots in the motivation theories you read about in Chapter 13. The key difference, though, is that the goals, feedback, and rewards originate from employees themselves and not from their managers or organizations.
Review 2: Control Methods There are five methods of control: bureaucratic, objective, normative, concertive, and self-control (self-management). Bureaucratic and objective controls are top-down, management-based, and measurement-based. Normative and concertive controls represent shared forms of control because they evolve from company-wide or team-based beliefs and values. Self-control, or self-management, is a control system in which managers turn much, but not all, control over to the individuals themselves. Bureaucratic control is based on organizational policies, rules, and procedures. Objective controls are based on reliable measures of behavior or outputs. Normative control is based on strong corporate beliefs and careful hiring practices. Concertive control is based on the development of values, beliefs, and rules in autonomous work groups. Self-control is based on individuals’ setting their own goals, monitoring themselves, and rewarding or punishing themselves with respect to goal achievement. We end this section by noting that each of these control methods may be more or less appropriate depending on the circumstances. Examine Exhibit 16.3 to find out when each of these five control methods should be used. 3
WHAT TO CONTROL?
In the first section of this chapter, we learned the basics of the control process and that control isn’t always worthwhile or possible. In the second section, we looked at the various ways in which control can be obtained. In this third and
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535
• When it is necessary to standardize operating procedures • When it is necessary to establish limits
BEHAVIOR CONTROL
• When it is easier to measure what workers do on the job than what they accomplish on the job • When “cause-effect” relationships are clear, that is, when companies know which behaviors will lead to success and which won’t • When good measures of worker behavior can be created
OUTPUT CONTROL
• When it is easier to measure what workers accomplish on the job than what they do on the job • When good measures of worker output can be created • When it is possible to set clear goals and standards for worker output • When “cause-effect” relationships are unclear
NORMATIVE CONTROL
• When organizational culture, values, and beliefs are strong • When it is difficult to create good measures of worker behavior • When it is difficult to create good measures of worker output
CONCERTIVE CONTROL
• When responsibility for task accomplishment is given to autonomous work groups • When management wants workers to take “ownership” of their behavior and outputs • When management desires a strong form of worker-based control
SELF-CONTROL
• When workers are intrinsically motivated to do their jobs well • When it is difficult to create good measures of worker behavior • When it is difficult to create good measures of worker output • When workers have or are taught self-control and self-leadership skills
Sources: L. J. Kirsch, “The Management of Complex Tasks in Organizations: Controlling the Systems Development Process,” Organization Science 7 (1996): 1–21; S. A. Snell, ”Control Theory in Strategic Human Resource Management: The Mediating Effect of Administrative Information,” Academy of Management Journal 35 (1992): 292–327.
Exhibit 16.3
final section, we address an equally important issue, “What should managers control?” The way managers answer this question has critical implications for most businesses. In the midst of an economic slowdown, a medium-sized financial company created a huge upheaval when it tried to cut costs by eliminating company-paid-for cell phones. Salespeople were furious, claiming, “No other group in the company had their cell phone use restricted.” Lynda Ford, a consultant who was working with the company at the time, said that canceling cell phones “became the straw that broke the camel’s back.” As a result, salespeople started quitting and productivity dropped significantly. Several months later, realizing the policy was wrong, the company reinstated company cell phones.50 This financial company lost salespeople and productivity because it only worried about (i.e., controlled) one thing—reducing costs. Companies need to have a clear vision. They can’t be everything to everybody. Most companies successfully carry out their visions and missions by finding a balance that comes from doing a multitude of small things right, like managing costs, providing value, and keeping customers and employees satisfied.
When to Use Different Methods of Control
After reading this section, you should be able to explain 3.1 the balanced scorecard approach to control and how companies can achieve balanced control of company performance by choosing to control 3.2 budgets, cash flows, and economic value added, 3.3 customer defections, 3.4 quality, and 3.5 waste and pollution.
3.1 The Balanced Scorecard Most companies measure performance using standard financial and accounting measures, such as return on capital, return on assets, return on investments, cash flow, net income, net margins, and so forth. The balanced scorecard
balanced scorecard Measurement of organizational performance in four equally important areas: finances, customers, internal operations, and innovation and learning.
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encourages managers to look beyond traditional financial measures to four different perspectives on company performance. How do customers see us (the customer perspective)? At what must we excel (the internal perspective)? Can we continue to improve and create value (the innovation and learning perspective)? How do we look to shareholders (the financial perspective)?51 The balanced scorecard has several advantages over traditional control processes that rely solely on financial measures. First, it forces managers at each level of the company to set specific goals and measure performance in each of the four areas. For example, Exhibit 16.4 shows that Southwest Airlines uses nine different measures in its balanced scorecard. Of those, only three, market value, seat revenue, and plane lease costs (at various rates of compounded annual growth, or CAGR), are standard financial measures of performance. In addition, Southwest measures its FAA (Federal Aviation Administration) on-time arrival rating and the cost of its airfares compared to competitors (customer perspective); how much time each plane spends on the ground after landing and the percentage of planes that depart on time (internal business perspective); and the percentage of its ground crew workers, such as mechanics and luggage handlers, who own company stock and have received job training (learning perspective). The second major advantage of the balanced scorecard approach to control is suboptimization that it minimizes the chances of suboptimization, which occurs when performance Performance improvement in one part improves in one area, but only at the expense of decreased performance in others. of an organization but only at the Jon Meliones, chief medical director at Duke’s Children’s Hospital, stated, “We expense of decreased performance in another part. explained the [balanced scorecard] theory to clinicians and administrators like this. . . . if you sacrifice too much in one quadrant to satisfy another, your organization as a whole is thrown out of balance. We could, for example, cut costs to improve the financial quadrant by firing half the staff, but that would hurt quality of service, and the customer quadrant would fall out of balance. Or we could increase productivity in the internal business quadrant by assigning more patients to a nurse, but doing so would raise the likelihood of errors—an unacceptable trade-off.”52 Let’s examine some of the ways in which companies are controlling the four Exhibit 16.4 Southwest Airlines’ Balanced basic parts of the balanced scorecard: the financial perspective (budgets, cash Scorecard
FIN
AN
CIA
L
CUS
TOM
INT
ER
OBJECTIVES
MEASURES
TARGETS
Profitability
Market Value
30% CAGR
Increased Revenue
Seat Revenue
20% CAGR
Lower Costs
Plane Lease Cost
5% CAGR
On-Time Flights
FAA On-Time Arrival Rating
#1
Lowest Prices
Customer Ranking (Market Survey)
#1
Time on Ground
30 Minutes
On-Time Departure
90%
Cycle Time Optimization Program
% Ground Crew Shareholders
Year 1: 70% Year 3: 90% Year 5: 100%
Employee Stock Option Plan Ground Crew Training
ERN
LEA
AL
RNI
NG
Fast Ground Turnaround
Ground Crew Alignment with Company Goals
% Ground Crew Trained
INITIATIVES
Quality Management, Customer Loyalty Program
Sources: G. Anthes, “ROI Guide: Balanced Scorecard,” Computer World [Online] available at http://www.computerworld.com/managementtopics/roi/story/ 0,10801,78512,00.html, 5 May 2003.
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flows, and economic value added), the customer perspective (customer defections), the internal perspective (total quality management), and the innovation and learning perspective (waste and pollution).
3.2 The Financial Perspective: Controlling Budgets, Cash Flows, and Economic Value Added
537
STEPS FOR A BASIC CASH FLOW ANALYSIS
1. Forecast sales (steady, up, or down). 2. Project changes in anticipated cash inflows (as a result of changes). 3. Project anticipated cash outflows (as a result of changes). 4. Project net cash flows by combining anticipated cash inflows and outflows. PARTS OF A BASIC BALANCE SHEET (ASSETS = LIABILITIES + OWNER’S EQUITY)
1. Assets a. Current Assets (cash, short-term investment, marketable securities, accounts receivable, etc.) b. Fixed Assets (land, buildings, machinery, equipment, etc.)
The traditional approach to control2. Liabilities ling financial performance focuses a. Current Liabilities (accounts payable, notes payable, taxes payable, etc.) on accounting tools, such as cash b. Long-Term Liabilities (long-term debt, deferred income taxes, etc.) flow analysis, balance sheets, income statements, financial ratios, and bud3. Owner’s Equity gets. Cash flow analysis predicts how a. Preferred stock and common stock changes in a business will affect its b. Additional paid-in capital ability to take in more cash than it c. Retained earnings pays out. Balance sheets provide a BASIC INCOME STATEMENT snapshot of a company’s financial position at a particular time (but not SALES REVENUE the future). Income statements, also – sales returns and allowances called profit and loss statements, + other income show what has happened to an orga= NET REVENUE nization’s income, expenses, and net – cost of goods sold (beginning inventory, costs of goods purchased, ending profit (income less expenses) over a inventory) period of time. Exhibit 16.5 shows = GROSS PROFIT the basic steps or parts for cash flow – total operating expenses (selling, general, and administrative expenses) analyses, balance sheets, and income = INCOME FROM OPERATIONS statements. Financial ratios are typically – interest expense used to track a business’s liquidity = PRETAX INCOME (cash), efficiency, and profitability – income taxes over time compared to other busi= NET INCOME nesses in its industry. Exhibit 16.6 lists a few of the most common financial ratios and explains how they are calculated, what they mean, and Exhibit 16.5 when to use them. Finally, budgets are used to project costs and revenues, Basic Accounting Tools for Controlling Financial Performance prioritize and control spending, and ensure that expenses don’t exceed available funds and revenues. Exhibit 16.7 reviews the different kinds of budgets cash flow analysis A type of analysis that predicts how managers can use to track and control company finances. By themselves, none of these tools—cash flow analyses, balance sheets, income changes in a business will affect its ability to take in more cash than it pays out. statements, financial ratios, or budgets—tell the whole financial story of a business. They must be used together when assessing a company’s financial perfor- balance sheets mance. Since these tools are reviewed in detail in your accounting and finance Accounting statements that provide classes, only a brief overview is provided here. Still, these are necessary tools for a snapshot of a company’s financial controlling organizational finances and expenses, and they should be part of your position at a particular time. business toolbox. Unfortunately, most managers don’t (but should) have a good understanding of these accounting tools.53 When Boeing’s new chief financial income statements officer attended her first company retreat with other Boeing executives, she Accounting statements, also called assumed that her discussion of financial ratios, like those shown in Exhibit 16.6, “profit and loss statements,” that show would be a boring review for everyone present. Afterwards, she was shocked when what has happened to an organizadozens of the 280 executives attending the retreat told her that for the very first tion’s income, expenses, and net profit over a period of time. time they finally understood what the formulas meant.54 So, if, like those experienced executives, you struggle to understand how financial ratios can be used where you work, you might find help in the following
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RATIOS
FORMULA
LIQUIDITY RATIOS Current Current Assets Ratio Current Liabilities
Quick (Acid Test) Ratio
(Current Assets – Inventories) Current Liabilities
LEVERAGE RATIOS Debt to Total Liabilities Equity Total Equity
Debt Coverage
(Net Profit + Noncash Expense) Debt
EFFICIENCY RATIOS Inventory Cost of Goods Sold Turnover Average Value of Inventory
Average Collections Period
Accounts Receivable (Annual Net Credit Sales Divided by 365)
PROFITABILITY RATIOS Gross Profit Gross Profit Margin Total Sales
Return on Equity
Net Income Owner’s Equity
Exhibit 16.6 Common Financial Ratios
WHAT IT MEANS
WHEN TO USE
• Whether you have enough assets on hand to pay for short-term bills and obligations. • Higher is better. • Recommended level is two times as many current assets as current liabilities.
• Track monthly and quarterly. • Basic measure of your company’s health.
• Stricter than current ratio. Whether you have enough (i.e., cash) to pay short-term bills and obligations. • Higher is better. • Recommended level is one or higher.
• Track monthly. • Also calculate quick ratio with potential customers to evaluate whether they’re likely to pay you in a timely manner.
• Indicates how much the company is leveraged (in debt) by comparing what is owed (liabilities) to what is owned (equity). • Lower is better. A high debt-to-equity ratio could indicate that the company has too much debt. • Recommended level depends on industry.
• Track monthly. • Lenders often use this to determine the creditworthiness of a business (i.e., whether to approve additional loans).
• Indicates how well cash flow covers debt payments. • Higher is better.
• Track monthly. • Lenders look at this ratio to determine if there is adequate cash to make loan payments.
• Whether you’re making efficient use of inventory. • Higher is better, indicating that inventory (dollars) isn’t purchased (spent) until needed. • Recommended level depends on industry.
• Track monthly by using a 12-month rolling average.
• Shows on average how quickly your customers are paying their bills. • Recommended level is no more than 15 days longer than credit terms. If credit is net 30 days, then average should not be longer than 45 days.
• Track monthly. • Use to determine how long company’s money is being tied up in customer credit.
• Shows how efficiently a business is using its materials and labor in the production process. • Higher is better, indicating that a profit can be made if fixed costs are controlled.
• Track monthly. • Analyze when unsure about product or service pricing. Low margin compared to competitors means you’re underpricing.
• Shows what was earned on your investment in the business during a particular period. Often called “return on investment.” • Higher is better.
• Track quarterly and annually. • Use to compare what you might have earned on the stock market, bonds, or government Treasury bills during the same period.
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Revenue Budgets—used to project or forecast future sales.
• Accuracy of projection depends on economy, competitors, sales force estimates, etc. • Determined by estimating future sales volume and sales prices for all products and services.
Expense Budgets—used within departments and divisions to determine how much will be spent on various supplies, projects, or activities.
• One of the first places that companies look for cuts when trying to lower expenses.
Profit Budgets—used by profit centers, which have “profit and loss” responsibility.
• Profit budgets combine revenue and expense budgets into one budget. • Typically used in large businesses with multiple plants and divisions.
Cash Budgets—used to forecast how much cash a company will have on hand to meet expenses.
• Similar to cash flow analyses. • Used to identify cash shortfalls, which must be covered to pay bills, or cash excesses, which should be invested for a higher return.
Capital Expenditure Budgets—used to forecast large, long- • Help managers identify funding that will be needed to pay lasting investments in equipment, buildings, for future expansion or strategic moves designed to increase and property. competitive advantage. Variable Budgets—used to project costs across varying levels of sales and revenues.
• Important because it is difficult to accurately predict sales revenue and volume. • Lead to more accurate budgeting with respect to labor, materials, and administrative expenses, which vary with sales volume and revenues. • Build flexibility into the budgeting process.
Exhibit 16.7 Common Kinds of Budgets
books: Accounting the Easy Way, by Peter J. Eisen; Accounting for Dummies and How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, both by John A. Tracy; Schaum’s Quick Guide to Business Formulas: 201 DecisionMaking Tools for Business, Finance, and Accounting Students, by Joel G. Siegel, Jae K. Shim, and Stephen W. Hartman; The Vest-Pocket Guide to Business Ratios, by Michael R. Tyran; Essential Managers: Managing Budgets, by Stephen Brookson; or Forecasting Budgets: 25 Keys to Successful Planning (The New York Times Pocket MBA Series), by Norman Moore and Grover Gardner. Though no one would dispute the importance of cash flow analyses, balance sheets, income statements, financial ratios, or budgets for determining the financial health of a business, accounting research also indicates that the complexity and sheer amount of information contained in these accounting tools can shut down the brain and glaze over the eyes of even the most experienced manager.55 Sometimes, there’s simply too much information to make sense of. The balanced scorecard simplifies things by focusing on one simple question when it comes to finances: How do we look to shareholders? One way to answer that question is through something called economic value added. Conceptually, economic value added (EVA) is more than just profits. It is the amount by which profits exceed the cost of capital in a given year. It is based on the simple idea that it takes capital to run a business and that capital comes at a cost. Although most people think of capital as cash, capital, once invested (i.e., spent), is more likely to be found in a business in the form of computers, manufacturing plants, employees, raw materials, and so forth. And just like the interest that a homeowner pays on a mortgage or that a college student pays on a student loan, there is a cost to that capital. The most common costs of capital are the interest paid on long-term bank loans used to buy all those resources, the interest paid to bondholders (who lend organizations their money), and the dividends (cash payments) and growth in stock value that accrue to shareholders. EVA is positive when company profits
financial ratios Calculations typically used to track a business’s liquidity (cash), efficiency, and profitability over time compared to other businesses in its industry.
budgets Quantitative plans through which managers decide how to allocate available money to best accomplish company goals.
economic value added (EVA) The amount by which company profits (revenues minus expenses minus taxes) exceed the cost of capital in a given year.
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1. Calculate Net Operating Profit After Tax (NOPAT).
$3,500,000
2. Identify how much capital the company has invested (i.e., spent).
$16,800,000
3. Determine the cost (i.e., rate) paid for capital (usually between 5 percent and 13 percent).
10%
4. Multiply capital used (Step 2) times cost of capital (Step 3).
(10% 3 $16,800,000) = $1,680,000
5. Subtract the total dollar cost of capital from net profit after taxes.
$3,500,000 Net Operating Profit After Tax –$1,680,000 Total Cost of Capital $1,820,000 Economic Value Added
Exhibit 16.8 Calculating Economic Value Added (EVA)
(revenues minus expenses minus taxes) exceed the cost of capital in a given year. In other words, if a business is to truly grow, its revenues must be large enough to cover both short-term costs (annual expenses and taxes) and long-term costs (the cost of borrowing capital from bondholders and shareholders). If you’re a bit confused, the late Roberto Goizueta, the former CEO of Coca-Cola, explained it this way: “You borrow money at a certain rate and invest it at a higher rate and pocket the difference. It is simple. It is the essence of banking.”56 Exhibit 16.8 shows how to calculate EVA. First, starting with a company’s income statement, you calculate Net Operating Profit After Taxes (NOPAT) by subtracting taxes owed from Income from Operations (see Exhibit 16.5 for a review of an income statement). The NOPAT shown in Exhibit 16.8 is $3,500,000. Second, identify how much capital the company has invested (i.e., spent). Total liabilities (what the company owes) less accounts payable and less accrued expenses, neither of which you pay interest on, provides a rough approximation of this amount. In Exhibit 16.8, total capital invested is $16,800,000. Third, calculate the cost (i.e., rate) paid for capital by determining the interest paid to bondholders (who lend organizations their money), which is usually somewhere between 5 and 8 percent, and the return that stockholders want in terms of dividends and stock price appreciation, which is historically about 13 percent. Take a weighted average of the two to determine the overall cost of capital. In Exhibit 16.8, the cost of capital is 10 percent. Fourth, multiply the total capital ($16,800,000) from Step 2 by the cost of capital (10 percent) from Step 3. In Exhibit 16.8, this amount is $1,680,000. Fifth, subtract the total dollar cost of capital in Step 4 from Net Profit After Taxes in Step 1. In Exhibit 16.8, this value is $1,820,000, which means that our example company has created economic value or wealth this year. If our EVA number had been negative, meaning that the company didn’t make enough profit to cover the cost of capital from bondholders and shareholders, then the company would have destroyed economic value or wealth by taking in more money than it returned.57 But why is EVA so important? First and most importantly, because it includes the cost of capital, it shows whether a business, division, department, profit center, or product is really paying for itself. The key is to make sure that managers and employees can see how their choices and behavior affect the company’s EVA. For example, because of EVA training and information systems, factory workers at Herman Miller, a leading office furniture manufacturer, understand that using more efficient materials, such as less expensive wooddust board instead of real wood sheeting, contributes an extra dollar of EVA from each desk the company makes.58 Second, because EVA can easily be determined for subsets of a company, such as divisions, regional offices, manufacturing plants, and sometimes even departments, it makes managers and workers at all levels pay much closer attention to their segment of the business. When company offices were being refurbished at Genesco, a shoe company, a worker who had EVA training handed CEO Ben Harris $4,000 in cash. The worker explained that he now understood the effect his job had on the company’s ability to survive and prosper. And since the
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541
MVA RANKING IN 2004
MVA RANKING IN 2003
1
1
General Electric
2
9
3
COMPANY
MARKET VALUE ADDED ($ MILLIONS)
ECONOMIC VALUE ADDED/(LOST) ($ MILLIONS)
$299,810
$5,288
ExxonMobil
197,782
14,456
3
Microsoft
178,032
6,426
4
2
Wal-Mart
161,693
4,972
5
10
Johnson & Johnson
138,199
5,655
6
15
United Health Group
112,755
1,897
7
7
Procter & Gamble
105,858
3,951
8
4
CitiGroup
99,485
4,536
9
5
Intel
97,468
1,720
10
13
Dell
88,086
1,891
Source: R. Grizzetti, “U.S. Performance 1000,” Stern Stewart & Co, [Online] available by request, http://www.sternstewart.com, 20 June 2005.
Exhibit 16.9
company was struggling, he had sold the old doors that had been removed during remodeling so that the company could have the cash.59 In other words, EVA motivates managers and workers to think like small business owners who must scramble to contain costs and generate enough business to meet their bills each month. And, unlike many kinds of financial controls, EVA doesn’t specify what should or should not be done to improve performance. Thus, it encourages managers and workers to be creative in looking for ways to improve EVA performance. Exhibit 16.9 shows the top 10 companies in terms of EVA and market value added (MVA), as measured by the Stern Stewart Performance 1000 index. Remember that EVA is the amount by which profits exceed the cost of capital in a given year. So the more that EVA exceeds the total dollar cost of capital, the better a company has used investors’ money that year. MVA is simply the cumulative EVA created by a company over time. Thus, MVA indicates how much value or wealth a company has created or destroyed in total during its existence. As indicated by the MVA figures in Exhibit 16.9, over time the top 10 companies have created considerable wealth, ranging from almost $88 billion at Dell to $300 billion at General Electric; thus, they have returned substantially more than they took in. All of the top 10 in MVA had positive EVAs in the most recent year. However, this doesn’t always happen. Good businesses sometimes have years with negative EVAs.
3.3 The Customer Perspective: Controlling Customer Defections The second aspect of organizational performance that the balanced scorecard helps managers monitor is customers. It does so by forcing managers to address the question, “How do customers see us?” Unfortunately, most companies try to answer this question through customer satisfaction surveys, but these are often misleadingly positive. Most customers are reluctant to talk about their problems because they don’t know who to complain to or think that complaining will not do any good. Indeed, a study by the federal Office of Consumer Affairs found that 96 percent of unhappy customers never complain to anyone in the company.60 Another reason that customer satisfaction surveys can be misleading is that sometimes even very satisfied customers will leave to do business with competitors. Dave Nichol, founder of the President’s Choice brand, explained why: “Customer loyalty is the absence of something better.”61 So, even if customers are pleased, they may go elsewhere if they believe they can get a better product or service. Finally, customer satisfaction surveys can be misleading because they
Leading Companies by Market Value Added and Economic Value Added.
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customer defections A performance assessment in which companies identify which customers are leaving and measure the rate at which they are leaving.
greatly overestimate the degree to which customers will buy from a company again. For example, it’s common for automakers to advertise that “90 percent of customers are satisfied with their cars.” But what they don’t say in their advertising is that only 30 to 40 percent of car buyers purchase their next car from the same company.62 Rather than pouring over customer satisfaction surveys from current customers, studies indicate that companies may do a better job of answering the question “How do customers see us?” by closely monitoring customer defections, that is, by identifying which customers are leaving the company and measuring the rate at which they are leaving. Unlike the results of customer satisfaction surveys, customer defections and retention do have a great effect on profits. For example, very few managers realize that obtaining a new customer costs five times as much as keeping a current one. In fact, the cost of replacing old customers with new ones is so great that most companies could double their profits by increasing the rate of customer retention by just 5 to 10 percent per year.63 And, if a company can keep a customer for life, the benefits are even larger. According to Stew Leonard, owner of the Connecticut-based Stew Leonard’s grocery store chain, “The lifetime value of a customer in a supermarket is about $246,000. Every time a customer comes through our front door I see, stamped on their forehead in big red numbers, ‘$246,000.’ I’m never going to make that person unhappy with me. Or lose her to the competition.”64 Beyond the clear benefits to the bottom line, the second reason to study customer defections is that customers who have left are much more likely than current customers to tell you what you are doing wrong. Perhaps the best way to tap into this source of good feedback is to have top-level managers from various departments talk directly to customers who have left. It’s also worthwhile to have top managers talk to dissatisfied customers who are still with the company. Every day, John Chambers, CEO of Cisco Systems, listens to 15 to 20 voice mails that have been forwarded to him from dissatisfied Cisco customers. Chambers says, “Email would be more efficient, but I want to hear the emotion, I want to hear the frustration, I want to hear the caller’s level of comfort with the strategy we’re employing. I can’t get that through email.” Likewise, at Vanguard, a leading investment fund company, CEO Jack Brennan visits the customer call center and, working alongside call representatives, answers customer questions and addresses customer complaints.65 Some might argue that it’s a waste of valuable executive time to have upper-level managers make or listen to these calls, but there’s no faster way for the people in charge to learn what needs to be done than to hear it directly from customers who are unhappy with the company’s performance. Finally, companies that understand why customers leave can not only take steps to fix ongoing problems, but can also identify which customers are likely to leave and make changes to prevent them from leaving.
3.4 The Internal Perspective: Controlling Quality The third part of the balanced scorecard, the internal perspective, consists of the processes, decisions, and actions that managers and workers make within the organization. In contrast to the financial perspective of EVA and the outwardlooking customer perspective, the internal perspective asks the question “At what must we excel?” For McDonald’s, the answer would be quick, low-cost food. For America Online, the answer would be reliability—when your modem dials, the network should be up and running, and you should be able to connect without getting a busy signal. Yet no matter what area a company chooses, the key is to excel in that area. Consequently, the internal perspective of the balanced scorecard usually leads managers to a focus on quality. Quality is typically defined and measured in three ways: excellence, value, and conformance to expectations.66 When the company defines its quality goal as excellence, then managers must try to produce a product or service of unsurpassed
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performance and features. For example, by almost any count, Singapore International Airlines (SIA) is “the best” airline in the world. It has been named “best” 14 years in a row by readers of Conde Nast Traveler magazine.67 It has also received various “best airline” awards from the Asian Wall Street Journal, Business Traveler International, Germany Business Traveler, Travel and Leisure, and Fortune.68 Even SIA’s competitors recognize its excellence. Air Transport World, the magazine read by those who work in the airline industry, stated, “In an age in which more and more airlines are delivering less and less, it is especially pleasing to be able to recognize one that never stops reaching for the skies. This year’s winner of our Passenger Service Award, Singapore Airlines, is always on the lookout for new ways to satisfy its customers.”69 SIA was the first airline to introduce a choice of meals, complimentary drinks, and earphones in coach class in the 1970s. It was the first to introduce worldwide video, news, telephone, and fax service (40 video channels with movies, news, and documentaries, 50 CDs for music, and 50 different games, all viewed on 10.4-inch monitors). SIA has had AC power for laptop computers for some time, and now it has become the first airline to introduce on-board, realtime, high-speed Internet access.70 Value is the customer perception that the product quality is excellent for the price offered. At a higher price, for example, customers may perceive the product to be less of a value. When a company emphasizes value as its quality goal, managers must simultaneously control excellence, price, durability, or other features of a product or service that customers strongly associate with value. One company that has put value at the core of everything it does is Lands’ End, the catalog Source: “The Lands’ End Principles of Doing Business,” Lands’ End Web site, company that sells quality clothing and accessories at reason- [Online] available at http://www.landsend.com, 20 June 2005. Reprinted with permission of Lands’ End, Inc. able prices. In its advertising, Lands’ End says, “Value is more than price. Value is the combination of product quality, world class customer service, and a fair price.” Lands’ End puts its commitment to Exhibit 16.10 The Lands’ End Principles of Doing value into practice through its eight principles of doing business, which are Business shown in Exhibit 16.10. When a company defines its quality goal as conformance to specifications, employees must base decisions and actions on whether services and products measure up to standard specifications. In contrast to excellence and value-based value Customer perception that the product definitions of quality that can be somewhat ambiguous, measuring whether quality is excellent for the price offered. products and services are “in spec” is relatively easy. Furthermore, while conformance to specifications (i.e., precise tolerances for a part’s weight or thickness) is usually associated with manufacturing, it can be used equally well to control quality in nonmanufacturing jobs. Exhibit 16.11, on the next page, shows a checklist that a cook or restaurant owner would use to ensure quality when buying fresh fish. The way in which a company defines quality affects the methods and measures that workers use to control quality. Accordingly, Exhibit 16.12, also on the next page, shows the advantages and disadvantages associated with the excellence, value, and conformance to specification definitions of quality.
3.5 The Innovation and Learning Perspective: Controlling Waste and Pollution The last part of the balance scorecard, the innovation and learning perspective, addresses the question “Can we continue to improve and create value?” Thus, the
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QUALITY CHECKLIST FOR BUYING FRESH FISH FRESH WHOLE FISH Gills Eyes Smell Skin Flesh Belly cavity
ACCEPTABLE
NOT ACCEPTABLE
bright red, free of slime, clear mucus
brown to grayish, thick, yellow mucus
clear, bright, bulging, black pupils
dull, sunken, cloudy, gray pupils
inoffensive, slight ocean smell
ammonia, putrid smell
opalescent sheen, scales adhere tightly to skin
dull or faded color, scales missing or easily removed
firm and elastic to touch, tight to the bone
soft and flabby, separating from the bone
no viscera or blood visible, lining intact, no bone protruding
incomplete evisceration, cuts or protruding bones, off-odor
Sources: “A Closer Look: Buy It Fresh, Keep It Fresh,” Consumer Reports Online, [Online] available at http://www.seagrant.sunysb.edu/SeafoodTechnology/SeafoodMedia/CR022001/CR-SeafoodII020101.htm, 20 June 2005; “How to Purchase: Buying Fish,” AboutSeaFood Web site, [Online] available at http://www.aboutseafood.com/faqs/purchase1.html, 20 June 2005.
Exhibit 16.11 Conformance to Specifications Checklist for Buying Fresh Fish
Exhibit 16.12 Advantages and Disadvantages of Different Measures of Quality QUALITY MEASURE
Excellence
Value
Conformance to Specifications
innovation and learning perspective involves continuous improvement in ongoing products and services (discussed in Chapter 18), as well as relearning and redesigning the processes by which products and services are created (discussed in Chapter 7). Since these are discussed in more detail elsewhere in the text, this section reviews an increasingly important topic, waste and pollution minimization. Exhibit 16.13 shows the four levels of waste minimization, from waste disposal, which produces the smallest minimization of waste, to waste prevention and reduction, which produces the greatest minimization.71 The goals of the top level, waste prevention and reduction, are to prevent waste and polluADVANTAGES
DISADVANTAGES
Promotes clear organizational vision.
Provides little practical guidance for managers.
Being/providing the “best” motivates and inspires managers and employees.
Excellence is ambiguous. What is it? Who defines it?
Appeals to customers, who “know excellence when they see it.”
Difficult to measure and control.
Customers recognize differences in value.
Can be difficult to determine what factors influence whether a product/service is seen as having value.
Easier to measure and compare whether products/services differ in value.
Controlling the balance between excellence and cost (i.e., affordable excellence) can be difficult.
If specifications can be written, conformance to specifications is usually measurable.
Many products/services cannot be easily evaluated in terms of conformance to specifications.
Should lead to increased efficiency.
Promotes standardization, so may hurt performance when adapting to changes is more important.
Promotes consistency in quality.
May be less appropriate for services, which are dependent on a high degree of human contact.
Source: Republished with permission of Academy of Management, PO Box 3020, Briar Cliff Manor, NY, 10510-8020. C. A. Reeves & D. A. Bednar, “Defining Quality: Alternatives and Implications,” Academy of Management Review 19 (1994): 419–445. Reproduced by permission of the publisher via Copyright Clearance Center, Inc.
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tion before they occur, or to reduce them when they do occur. There are three strategies for waste prevention and reduction. 1. Good housekeeping—perWaste forming regularly scheduled Prevention preventive maintenance for & Reduction offices, plants, and equipment. Quickly fixing leaky valves and making sure machines are running properly so that they don’t use more fuel than necessary are Recycle & Reuse examples of good housekeeping. For example, Doug Goulding, a maintenance supervisor at Canada Cordage, a producer of synWaste Treatment thetic and natural fiber ropes, reduced the water bills at the company’s factory in Kitchener, Canada, from $1,200 to $200 per Waste Disposal month by systematically plugging leaks in machines and pipes and installing Source: D. R. May & B. L. Flannery, “Cutting Waste with Employee Involvement Teams,” Business Horizons, September–October 1995, 28–38. Reprinted with permission from Business Horizons, © 1995 by the Trustees at Indiana University, Kelley School of water-saving devices.72 2. Material/product substitution Business. —replacing toxic or hazExhibit 16.13 ardous materials with less harmful materials. As part of its Pollution PrevenFour Levels of Waste Minimization tion Pays program over the last 30 years, 3M eliminated 2.2 billion pounds of pollutants and saved $1 billion by using benign substitutes for toxic solvents in its manufacturing processes.73 3. Process modification—changing steps or procedures to eliminate or reduce waste. Cargill Dow has developed a way to use corn to make biodegradable plastic that is used in carpets, T-shirts, and the plastic baskets in which strawberries are sold. Compared to plastic made from oil, corn-made plastic reduces greenhouse gas emissions by 20 to 60 percent.74 Similarly, by changing the manufacturing process at its Midland, Michigan plant, Dow Chemical was able to reduce chloromethane gas waste by 97 percent. And by not having to treat the gas to turn it into a safe, inert compound, Dow is saving $3.3 million per year.75 At the second level of waste minimization, recycle and reuse, wastes are reduced by reusing materials as long as possible or by collecting materials for on- or off-site recycling. Sears recycles the 90 million clothes hangers used at its 860 stores each year. The hangers are collected and shipped to Sears’ distribution centers where they are reused or processed for recycling. In a recent year, Sears also recycled 48,000 tons of corrugated cardboard, 1,000 tons of plastic bags and coverings, and 995,000 plastic ratchets. Over the last eight years, Sears has reduced waste by 60 percent. Now, 48 percent of its waste is recycled.76 A growing trend in recycling is design for disassembly, where products are designed from the start for easy disassembly, recycling, and reuse once they are no longer usable. For example, the European Union (EU) is moving toward prohibiting companies from selling products unless most of the product
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© AP WIDE WORLD PHOTOS
and its packaging can be recycled.77 Since companies, not consumers, will be held responsible for recycling the products they manufacture, they must design their products from the start with recycling in mind.78 At reclamation centers throughout Europe, companies will have to be able to recover and recycle 80 percent of the parts that go into their original products.79 Already, under the EU’s end-oflife vehicle program, all cars built in Europe since June 2002 are subject to the 80 percent requirement, which will rise to 85 percent in 2006 and 95 percent by 2015 for autos. Moreover, beginning in 2007, the EU will require auto manufacturers to pay to recycle all the cars they made between 1989 and 2002.80 One company that already does this in part is Bosch in Germany, which takes back old auto alternators, remanufactures them, and then resells them, certifying that they are as good as new.81 At the third level of waste minimization, waste treatment, companies use biological, chemical, or other processes to turn potentially harmful waste into harmless compounds or useful by-products. For example, during “pickling,” a process in the manufacture of steel sheets, the steel is bathed in an acid solution to clean impurities and oxides (that would rust) from its surface. Getting rid of the “pickle juice” has always been a problem. Not only is the juice an acid, but it also contains ferric chloride and other metals that prevent steelmakers from dumping it into local water supplies. Fortunately, Magnetics International has found a safe, profitable way to treat the pickle juice. It sprays the juice into a 100-foot-high chamber at 1,200 degrees Fahrenheit. The iron chloride in the juice reacts with oxygen at that temperature to form pure iron oxide, which can be transformed into a useful magnetic powder. Inland Steel is now using this process to transform pickle juice into 25,000 tons of magnetic powder that can be reused in electric motors, stereo speakers, and refrigerator gaskets.82 The fourth and lowest level of waste minimization is waste disposal. Wastes that cannot be prevented, reduced, recycled, reused, or treated should be safely disposed of in processing plants or in environmentally secure landfills that prevent leakage and contamination of soil and underground water supplies. Contrary to common belief, all businesses, not just manufacturing firms, have waste disposal problems. For example, with the average computer lasting just three years, approximately 60 million computers come out of service each year, creating disposal problems for offices all over the world.83 But with cathode ray tubes in the monitors that contain lead, toxic metals in the circuit boards, paintcoated plastic, and metal coatings that can contaminate ground water, organizations can’t just throw old computers away.84 Many companies give old computers and computer equipment to local computer recycling centers that distribute usable computers to nonprofit organizations or correctly dispose of lead and other toxic materials. Hewlett-Packard has started a unique computer disposal program that allows individual computer users to recycle PCs and electronic equipment. Prices range from $13 to $34 per item. The service is available at http://www.hp.com/hpinfo/globalcitizenship/environment/ recycle/index.html. With three clicks and a credit card number, H-P will arrange
Waste disposal is becoming an increasingly important issue for many businesses, particularly computer manufacturers. At HewlettPackard’s computer recycling operation, computer cases are sorted into bins for crushing after parts have been removed.
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to pick up the old PC equipment and properly dispose of it.85 The company makes no profit from this service.
Review 3: What to Control? Deciding what to control is just as important as deciding whether to control or how to control. In most companies, performance is measured using financial measures alone. However, the balanced scorecard encourages managers to measure and control company performance from four perspectives: financial, customers, internal operations, and innovation and learning. Traditionally, financial control has been achieved through cash flow analysis, balance sheets, income statements, financial ratios, and budgets. Another way to measure and control financial performance, however, is through economic value added (EVA). Unlike traditional financial measures, EVA helps managers assess whether they are performing well enough to pay the cost of the capital needed to run the business. Instead of using customer satisfaction surveys to measure performance, companies should pay attention to customer defectors, who are more likely to speak up about what the company is doing wrong. Performance of internal operations is often measured in terms of quality, which is defined in three ways: excellence, value, and conformance to expectations.86 Minimization of waste has become an important part of innovation and learning in companies. The four levels of waste minimization are waste prevention and reduction, recycling and reuse, waste treatment, and waste disposal.
Key Terms balanced scorecard, 535 balance sheets, 537 behavior control, 531 benchmarking, 525 budgets, 539 bureaucratic control, 530 cash flow analysis, 537 concertive control, 533 concurrent control, 527
control, 524 control loss, 528 customer defections, 542 cybernetic, 526 cybernetic feasibility, 529 economic value added (EVA), 539 feedback control, 527 feedforward control, 527 financial ratios, 539
income statements, 537 normative control, 532 objective control, 531 output control, 531 regulation costs, 528 self-control (self-management), 534 standards, 524 suboptimization, 536 value, 543
Concept Check 1. Describe the basic control process 2. How can a manager determine if more control is necessary or even possible? 3. What are a manager’s options if more control isn’t possible? 4. Identify and describe the various methods that managers can use to maintain control. 5. Explain how concertive control evolves in an organization.
6. Describe the elements of the balanced scorecard. 7. Explain why economic value added (EVA) includes more than just profits. 8. What can companies do to control the customer perspective? 9. What is quality, and how does it differ from value? 10. Describe the strategies managers can use for waste prevention and reduction.
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Self-Assessment TOO MUCH INFORMATION? Imagine that your professor handed back term papers, and the only mark on yours was the grade. Would you be content, or would you feel gypped? People have different comfort about receiving feedback: Some thrive on it; others are ambivalent. What about you? Would you rather see comments in the margins of your term
paper or not? The Self-Assessment Appendix contains a 32-question survey to give you insights into your perceptions of feedback. Understanding your preferences in this area will help you develop the skills you’ll need as a manager. Turn to page 623 to find out more about your interest in feedback.
Management Decision BALANCING PRODUCTIVITY AND RISK ON THE INTERNET When your insurance company, Penn National, first went online, your employees quickly became exuberant users of all things Internet.87 Now that the Internet is ubiquitous (most employees have access outside work), heavy personal usage at work has declined a bit, but security risks still exist. One of the greatest comes from phishing attacks. The Wall Street Journal gave a very succinct explanation in a recent article: “In its mostbasic form, phishing is crafting an email that pretends to be from a financial institution, e-commerce site, or some organization you have a relationship with. The email—which can appear to come from the organization and even include its logo—claims that account information urgently needs updating, or some transaction needs to be made. Users are typically asked to click a Web link in the email. The link typically looks like it leads to the organization’s Web site, but it goes to a lookalike site, and any personal information offered up there winds up in the hands of the phisher, who may use it to run up credit-card charges, lock the user out of his or her own account, or steal his or her identity.” Because today’s employees (yours included) consider themselves quite savvy with regard to the Internet, many downplay the dangers of scams like phishing. In fact, most employees are at much bigger risk from things like phishing attacks than they think. In one survey, only 4 percent of employees said they had fallen for a phishing attacks, but nearly 45 percent of IT managers said that workers did click through links on phishing email. For your company, that discrepancy represents a serious risk. Your 900 employees use the Web as a valuable research and information-gathering tool, increasing company productivity. Annual written premiums are at $511 million and assets at $1.3 billion. If your
employees are unaware of criminal strategies to gain access to corporate information or are ashamed to admit they’ve been duped, then Penn National may be an easy target for security breaches. New federal legislation requires financial services and insurance companies to take measures to protect their corporate assets and consumers’ confidential financial information from emerging Internet threats like phishing, key-logging applications, and malicious spyware. Recreational Internet surfing opens your company up to all of those threats. Furthermore, they can go undetected for extended periods of time, resulting in a continuous, long-term extraction of sensitive information by ill-meaning third parties. Today, there are all kinds of software packages that will monitor employees’ Web activities, and some are extremely comprehensive. Until now, you have simply reprimanded employees whose personal use of the Internet at work became excessive. But with increased risks and regulations, you may need a more formal way to handle future use and abuse. Or do you? Consumer-products giant Procter & Gamble doesn’t monitor the Web use of its employees (and there are tens of thousands of them). P&G recognizes that managers have more to do then look over workers’ shoulders all day and that, at some point, you just have to trust your employees to act responsibly and wisely. Questions 1. Can you control employees’ personal Internet use at work? 2. Do you trust employees to use their common sense and good judgment, or do you risk a backlash from perpetually looking over their shoulders via monitoring software? 3. If you do opt for control measures, which would be most appropriate in this situation?
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Management Team Decision IS H & R BLOCK TAXED TO ITS LIMITS? When you first came to H & R Block four years ago, you had a vision: increase the scope of the company and transform it from a simple tax preparation service to a full-service financial services provider.88 And why not? Block has roughly 17 million customers, and converting only a fraction of them to financial services clients would mean substantial growth for the 60-year-old company. Couple that with the company’s recent expansion into mortgage financing, and Block could become a financial services powerhouse. Eagerly you set about mapping the company’s growth. You bought Olde Financial, a discount-brokerage business, and quickly found yourself with around $50 billion in assets under management. You hired financial advisers, and then to get them more clients, you instructed tax preparers to refer new financial prospects to them. Another way you planned to fuel growth was by aggressively opening new tax preparation outlets. Today, Block has more U.S. storefronts (over 11,000) than Barnes & Noble (2,356), Gap (3,051), and even growth-happy Starbucks (6,409)! Over one thousand outlets were added just this year to expand coverage during tax-filing season. Despite all the good ideas, H & R Block is not producing the results you expected. In fact, it is struggling. Assets under management in the financial services division have declined by more than 30 percent (around $28 billion) since the division was acquired, and its advisers are leaving faster than they can be replaced. Outwardly, you say that the economic upswing is creating more demand for junior advisers, the largest percentage of your financial managers, but you also know that even new advisers are going to follow the money. And the money seems to be flowing out of Block. Mortgage refinancing, which at its peak contributed an incredible 70 percent of pretax income, now contributes only 28 percent per year, or $112 million. Mortgage activity has dropped since the Federal Reserve began increasing interest rates, and competitive pricing among lenders has not subsided as you expected it would.
On the tax front, the company faces serious competition from smaller upstarts like Jackson Hewitt and Liberty Tax Service, which are both experiencing increases in the number of returns prepared at Block’s expense. This tax season Jackson Hewitt handled nearly 6 percent more returns than last year. Compare that to Block, which has lost over 1 million customers in the past three years. Aggressive cost cutting is minimizing damage to the bottom line, but it is also having some adverse effects, including waits as long as two to three hours for some customers. Digitally, Block is being surpassed by Intuit’s TurboTax software. Even though Intuit’s TurboTax costs 50 percent more than Block’s competing TaxCut software, Intuit has three times the market share of TaxCut, and is growing by double digits each tax season. All this trouble has caused Block’s revenues to slide over 5 percent from last year. As you hang up the phone from yet another apologetic conference call with Wall Street analysts, during which you revised your expectations for earnings per share sharply downward, you sigh and sink back into your chair. You are getting tired of announcing quarterly losses. Plans should be flexible enough to change if expected results don’t materialize, but you really believe in the growth strategy. One analyst even said, “It seems like a smart strategy, and they seem to have the right infrastructure, but for some reason it’s just not happening.” You think to yourself, “There’s got to be a way to get things back on track!” Form a team of four students to answer the following questions. Questions 1. As a team, identify where more control is needed at H & R Block. Is control in these areas possible? Explain. 2. Build a balanced scorecard for H & R Block that proposes objectives and measures for each the four quadrants of the card (financial, customer, internal, and learning).
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Develop Your Career Potential LEARNING FROM FAILURE There is the greatest practical benefit of making a few failures early in life. —T. H. Huxley
No one wants to fail.89 Everyone wants to succeed. Nevertheless, some businesspeople believe that failure can have enormous value. At Microsoft, founder and chairman Bill Gates encourages his managers to hire people who have made mistakes in their jobs or careers. A Microsoft vice president said, “We look for somebody who learns, adapts, and is active in the process of learning from mistakes. We always ask, what was a major failure you had? What did you learn from it?” Another reason that failure is viewed positively is that it is often a sign of risk taking and experimentation, both of which are in short supply in many companies. John Kotter, a Harvard Business School professor says, “I can imagine a group of executives 20 years ago discussing a candidate for a top job and saying, ‘This guy had a big failure when he was 32.’ Everyone else would say, ‘Yep, yep, that’s a bad sign.’ I can imagine that same group considering a candidate today and saying, ‘What worries me about this guy is that he’s never failed.’” Jack Matson, who teaches a class at the University of Michigan called Failure 101, says, “If you are doing something innovative, you are going to trip and fumble. So the more failing you do faster, the quicker you can get to success.” One of the most common mistakes that occurs after failure is the attribution error. An attribution is to assign blame or credit. When we succeed, we take credit for the success by claiming it was due to our strategies, how we behaved, and how hard we worked. When we fail, however, we ignore our strategies, how we behaved, and how hard we worked (or didn’t). Instead, when we fail, we assign the blame to other people, or to the circumstances, or to bad luck. In other words, the basic attribution error is that success is our fault but failure isn’t. The disappointment we feel when we fail often prevents us from learning from our failures. This means that attribution errors disrupt the control process. The three basic steps of control are to set goals and performance standards, to compare actual
performance to the performance standards, and to identify and correct performance deviations. When we put all of the blame on external forces rather than our own actions, we stop ourselves from identifying and correcting performance deviations. Furthermore, by not learning from our mistakes, we make it even more likely that we will fail again. Your task in this exercise is to begin the process of learning from failure. This is not an easy thing to do. When Fortune magazine writer Patricia Sellers wrote an article called “So You Fail,” she found that most of the people she contacted were reluctant to talk about their failures. She wrote: Compiling this story required months of pleading and letter writing to dozens of people who failed and came back. “If it weren’t for the ‘F’ word, I’d talk,” lamented one senior executive who got fired twice, reformed his know-it-all management style, and considered bragging about his current hot streak. Others cringed at hearing the word “failure” in the same breath as “your career.” Questions 1. Identify and describe a point in your life when you failed. Don’t write about simple or silly mistakes. The difference between a failure and a mistake is how badly you felt afterwards. Years later, a real failure still makes you cringe when you think about it. What was the situation? What were your goals? And how did it turn out? 2. Describe your initial reaction to the failure. Were you shocked, surprised, angry, or depressed? Initially, who or what did you blame for the failure? Explain. 3. One purpose of control is to identify and correct performance deviations. With that in mind, describe three mistakes that you made that contributed to your failure. Now that you’ve had time to think about it, what could you have done differently to prevent these mistakes? Finally, summarize what you learned from your mistakes that will increase your chances of success the next time around.
Take Two
Biz Flix Brazil
Brazil takes place in a retro-futuristic world in which automation pervades every facet of life, but paperwork, inefficiency, and mechanical failures are the rule. Brazil stars Jonathan Pryce in the role of Sam, a low-level bureaucrat. In this scene, Sam inadvertently gets wrapped up in an intrigue surrounding the so-called terrorist Harry Tuttle (played by Robert DeNiro), who is actually a renegade heating technician for whom the Ministry of Central Services has issued an arrest order. The clip moves quickly, so you may need to review it several times to really grasp the nuances in the conversation. What to Watch for and Ask Yourself
1. What kind of control is being used by Central Services? 2. Tuttle describes a paradox of control. What is it? 3. What kind of control does Tuttle seem to prefer? Explain.
Management Workplace Wahoo’s Fish Taco
Based in southern California, Wahoo’s Fish Taco is the brainchild of three brothers who grew up in the restaurant business. Because of their extensive experience in the industry, they spent many years managing from “between the ears.” That is, they never had any paperwork in place. They simply remembered everything they needed to do. By the time they had three stores, however, it was clear that they needed more formal control measures. What to Watch for and Ask Yourself
1. Based on the video, what methods of control seem most prevalent at Wahoo’s? 2. How does Steve Karfaridis use the cybernetic control process at Wahoo’s? 3. What does Wahoo’s need to control to be successful? In other words, what would Wahoo’s balanced scorecard potentially look like?
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Chapter17 What Would You Do? Why Information Matters 1. Strategic Importance of Information 1.1 First-Mover Advantage 1.2 Sustaining a Competitive Advantage
2. Characteristics and Costs of Useful Information 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9
Accurate Information Complete Information Relevant Information Timely Information Acquisition Costs Processing Costs Storage Costs Retrieval Costs Communication Costs
Getting and Sharing Information
3. Capturing, Processing, and Protecting Information 3.1 Capturing Information 3.2 Processing Information 3.3 Protecting Information
4. Accessing and Sharing Information and Knowledge 4.1 Internal Access and Sharing 4.2 External Access and Sharing 4.3 Sharing Knowledge and Expertise
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise
Xtra! Four exhibit worksheets, author FAQs, quiz, Management News, and the video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
Mayor’s Office, London, England.1 London has had serious traffic problems for more than a century. In the early 1900s, roads were so crowded with horses and wagons that traffic stood still for up to five hours a day. In 1935, a witness testifying for the Royal Commission on London Traffic said, “Unless we do provide some very far-reaching system, London will be almost unbearable in a few years.” In 1951, the London & Home Counties Traffic Advisory Committee concluded that the “saturation point has been reached . . . traffic has outgrown the capacity of the streets.” In 1959, the Ministry of Transport advised that the “traffic crisis will soon overtake the Metropolis.” And in 1988, the secretary of state for transport said, “If we don’t act, London will seize up in the next decade.” With a history like this, it’s not surprising that London has the worst traffic jams in Europe; as London drivers spend 50 percent of their time NOT moving in their vehicles. In 1903, with horsedrawn carriages, traffic moved at a pace of 12 mph. Today, with cars and trucks, traffic has slowed to 9 mph! The reasons are straightforward. First, most of central London’s streets are 400 to 600 years old; they were not designed for car and truck traffic and are narrow and cramped. Furthermore, whereas most of today’s cities have straight roads, London’s streets zig, zag, and confuse even the most experienced Londoners. In fact, on average London taxi drivers take two years to learn the city’s streets in preparation for their licensing exams! Second, with a population of 7.2 million, London has too many people in cars and trucks trying to get through those narrow streets. Consequently, streets and bridges resemble parking lots, and on many streets, pedestrians move faster than vehicles. Russ Kane, a longtime London traffic reporter, says, “It’s just the sheer weight of traffic. It happens all the time—you get to the end of a massive traffic jam and there’s nothing there at all. It’s just congestion. Pure and simple.” The question, of course, is what to do about the traffic. Over time, London has tried bobbies (police officers splattered with mud and horse droppings), the world’s first traffic lights, and then coordinated, computerized traffic lights designed to keep traffic flowing. But nothing has worked.
What Would You Do?
So, rather than trying to control the traffic, London’s mayor has decided to shrink it by charging a “Congestion Zone” fee of £5 (about $9) per day for any vehicle that enters the eight square miles of central London between 7 A.M. and 6:30 P.M. on weekdays. Your job is to use information technology to create an inexpensive, reliable, fair method for imposing and collecting the fee. Never mind that you’ve only got a year to design the system, that there are 174 ways in and out of the Congestion Zone, that no other city has ever attempted such a program, that the mayor has staked his job (and yours) on this project, and that it will be incredibly difficult to do from a technological standpoint. To impose the fee, you have to determine which vehicles are entering the Congestion Zone. With 250,000 vehicles entering each day, how can you accurately capture that information? Next, once you’ve collected data showing which vehicles have entered—however you do that—you have to process STUDY TIP those data into useful inforImagine you are the profesmation so that you can sor, and make up your own charge the companies and people that own those vehitest for Chapter 17. What are cles the appropriate fees. the main topics and key conFinally, you have to make the cepts that students should fee information accessible to know? If you work with a everyone from truck drivers, study group, exchange to corporate accountants, to taxi drivers, and in a way that practice tests. Work them enables them to pay the fees individually, then “grade” quickly and easily so that them collectively. This way they don’t incur late payment you can discuss trouble spots penalties (ranging from $75 and answer each other’s to $200). If you were in charge of managing this questions. information, what would you do?
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A generation ago, computer hardware and software had little to do with managing business information. Rather than storing information on hard drives, managers stored it in filing cabinets. Instead of uploading daily sales and inventory levels by satellite to corporate headquarters, they mailed hard-copy summaries to headquarters at the end of each month. Instead of word processing, reports were typed on an electric typewriter. Instead of spreadsheets, calculations were made on adding machines. Managers communicated by sticky notes, not email. Phone messages were written down by assistants and coworkers, not left on voice mail. Workers did not use desktop or laptop computers as a daily tool to get work done; they scheduled limited access time to run batch jobs on the mainframe computer (and prayed that the batch job computer code they wrote would work). Today, a generation later, computer hardware and software are an integral part of managing business information. In large part, this is due to something called Moore’s law. Gordon Moore is one of the founders of Intel Corporation, which makes 75 percent of the integrated processors used in personal computers. In 1965, Moore predicted that every 18 months, the cost of computing would drop by 50 percent as computer-processing power doubled.2 As Exhibit 17.1 shows, Moore was right. Every few years, computer power, as measured by the number of transistors per computer chip, has more than doubled. Consequently, the computer sitting in your lap or your desk is not only smaller, but also much cheaper and more powerful than the large mainframe computers used by Fortune 500 companies 15 years ago. In fact, if car manufacturers had achieved the same power increases and cost decreases attained by computer manufacturers, a fully outfitted Lexus or Mercedes sedan would cost less than $1,000! We begin this chapter by explaining why information matters. In particular, you will learn the value of strategic information to companies, as well as the cost and characteristics of good information. Next, you will investigate how companies capture, process, and protect information. Finally, you’ll learn how information is accessed and shared with those within and outside the company, and how knowledge and expertise (not just information or data) are shared, too.
Moore’s law The prediction that every 18 months, the cost of computing will drop by 50 percent as computer-processing power doubles.
Exhibit 17.1 Moore’s Law
1,000,000,000
Intel® Itanium® 2 Processor Intel® Itanium® Processor
100,000,000 Intel® Pentium® 4 Processor Intel® Pentium® III Processor Intel® Pentium® II Processor
Transistors
10,000,000
Intel® Pentium® Processor Intel486™ Processor
1,000,000
Intel386™ Processor 286
100,000 8086 10,000
8080
4004 1,000 1970
8008 1975
1980
1985
1990
1995
2000
Year Source: “Moore’s Law: Overviews,” © Intel Corporation, [Online] available at http://www.intel.com/research/silicon/mooreslaw.htm, 27 June 2005. Reprinted with permission of Intel Corporation.
2005
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555
Why Information Matters Raw data are facts and figures. For example, 11, $452, 1, and 26,100 are some
raw data
data that I used the day I wrote this section of the chapter. However, facts and figures aren’t particularly useful unless they have meaning. For example, you probably can’t guess what these four pieces of raw data represent, can you? And if you can’t, these data are useless. That’s why researchers make the distinction between raw data and information. Whereas raw data consist of facts and figures, information is useful data that can influence someone’s choices and behavior. So what did those four pieces of data mean to me? Well, 11 stands for channel 11, the local CBS affiliate on which I watched part of the men’s PGA golf tournament; $452 is how much it would cost me to rent a minivan for a week if I go skiing over spring break; 1 is for the 1-gigabyte storage card that I want to add to my digital camera (prices are low, so I’ll probably buy it); and 26,100 means that it’s time to get the oil changed in my car.
Facts and figures.
1 2
1
information Useful data that can influence people’s choices and behavior.
After reading the next two sections, you should be able to explain the strategic importance of information. describe the characteristics of useful information (i.e., its value and costs).
STRATEGIC IMPORTANCE OF INFORMATION
If you asked most top managers whether they thought real estate (i.e., office space, factory space, etc.) was critical to their businesses, most would say no. By contrast, says Charles Woznick, president and CEO of Facility Information Systems (FIS), “If you talk to somebody who manufactures automobiles, they can tell you what each of 40,000 parts costs down to the penny, and how many they will need to make cars this year.”3 According to Woznick, top managers should be paying attention to their real estate costs and gathering critical information to manage it. Using FIS’s software, companies can determine how much vacant space they have, which workers are sitting at which desks, even if those desks are in New York, Hong Kong, or London, and whether they have enough space for their workers or will need to rent or build new space. Sprint, the telecommunications company, uses FIS to track 85,000 employees in its 23 million square feet of office space. Paul Savastano, Sprint’s director of information technology, said, “You can say I have this many workstations nationwide, how many are vacant, and where they are. If I can find 100 workstations in the appropriate city or combination of buildings, I can save the company several million dollars over the term of a new lease.”4 In today’s hypercompetitive business environments, information, whether it’s about real estate, product inventory, pricing, or costs, is as important as capital (i.e., money) for business success. It takes money to get businesses started, but businesses can’t survive and grow without the right information. Information has strategic importance for organizations because it can be used to 1.1 obtain first-mover advantage and 1.2 sustain a competitive advantage once it has been created.
1.1 First-Mover Advantage First-mover advantage is the strategic advantage that companies earn by being the
first-mover advantage
first in an industry to use new information technology to substantially lower costs or to differentiate a product or service from that of competitors. For example, cable TV companies have taken a surprising lead over telephone companies in providing high-speed Internet access to people’s homes. As I write this, 19.9 million homes have high-speed cable modems, compared to just 13.3 million that have high-speed digital subscriber lines from phone companies.5
The strategic advantage that companies earn by being the first to use new information technology to substantially lower costs or to make a product or service different from that of competitors.
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Cable companies invested $90 billion to completely rewire their systems, replacing copper coaxial lines with digital lines that feed high-speed cable modems and digital TV cable channels alike (providing an average of 300 channels to compete with satellite TV like Dish Network or DirecTV).6 By contrast, the phone companies, ran into unexpected technical difficulties and high expenses and spent less than $20 billion to bring high-speed DSL service to people’s homes. Unlike cable systems, which are already able to provide high-speed Internet access in 99 percent of homes, the phone companies’ systems can supply only 65 percent of households with DSL service. Robert Ingalls Jr., president of Verizon’s retail market group (Verizon provides DSL services), says the battle “is going to be city by city, neighborhood by neighborhood. It’s going to be us versus the cable incumbents.”7 In all, first-mover advantages, like those established by high-speed Internet cable companies, can be sizable. On average, first movers earn a 30 percent market share, compared to 19 percent for the companies that follow.8 Likewise, over 70 percent of market leaders started as first movers.9
Exhibit 17.2 Using Information Technology to Sustain a Competitive Advantage
No
1.2 Sustaining a Competitive Advantage
Does the information technology create value?
Yes
Competitive Disadvantage
No
Is the information technology different across competing firms?
Yes
Competitive Parity
Is it difficult for another firm to create or buy the information technology? No Yes Temporary Competitive Advantage
Sustained Competitive Advantage
Source: Adapted from F. J. Mata, W. L. Fuerst, & J. B. Barney, “Information Technology and Sustained Competitive Advantage: A Resource-Based Analysis,” MIS Quarterly 19, no. 4, December 1995, 487–505. Reprinted by special permission by the Society for Information Management and the Management Information Systems Research Center at the University of Minnesota.
As described above, companies that use information technology to establish first-mover advantage usually have higher market shares and profits. According to the resource-based view of information technology shown in Exhibit 17.2, companies need to address three critical issues in order to sustain a competitive advantage through information technology. First, does the information technology create value for the firm by lowering costs or providing a better product or service? If an information technology doesn’t add value, then investing in it would put the firm at a competitive disadvantage to companies that choose information technologies that do add value. Second, is the information technology the same or different across competing firms? If all the firms have access to the same information technology and use it in the same way, then no firm has an advantage over another (i.e., competitive parity). Third, is it difficult for another company to create or buy the information technology used by the firm? If so, then the firm has established a sustainable competitive advantage over competitors through information technology. If not, then the competitive advantage is just temporary, and competitors should eventually be able to duplicate the advantages the leading firm has gained from information technology. For more about sustainable competitive advantage and its sources, see Chapter 6 on organizational strategy. In short, the key to sustaining a competitive advantage is not faster computers, more memory, and larger hard drives. The key is using information technology to continuously improve and support the core functions of a business.
Chapter 17: Managing Information
Ron Ireland, a former Wal-Mart manager, said, “Wal-Mart has always considered information technology as a competitive advantage, never as a business expense.”10 Thanks to innovative use of information technology and the largest private satellite network and database system in the world, Wal-Mart’s costs are 10 percent lower than its competitors’ costs.11 Wal-Mart was one of the first retailers to use computers and bar codes to track sales and inventory data and then share those data with suppliers. Today, Wal-Mart’s $4 billion supplier network, Retail Link, allows vendors like Ted Haedicke of Coca-Cola to “look at how much [and what kind of] Coke [has] sold . . . and at what prices at any store in the Wal-Mart system.” He went on to say, “You can’t do that with any other retailer today.”12 Companies like Wal-Mart that achieve first-mover advantage with information technology and then sustain it with continued investment create a moving target that competitors have difficulty hitting.
Review 1: Strategic Importance of Information The first company to use new information technology to substantially lower costs or differentiate products or services often gains first-mover advantage, higher profits, and larger market share. Creating a first-mover advantage can be difficult, expensive, and risky, however. According to the resource-based view of information technology, sustainable competitive advantage occurs when information technology adds value, is different across firms, and is difficult to create or acquire. 2
CHARACTERISTICS AND COSTS OF USEFUL INFORMATION
Portsmouth, a scenic city of 190,000 on the southern coast of England, attracts 6.5 million visitors a year, primarily because of its historic role as the home of the British Royal Navy. To handle the crush of visitors, Portsmouth relies on 320 buses, all equipped with computers and QDMA (quad-division multiple access) radio communication, which works reliably at speeds up to 250 miles per hour. Because the buses are networked, passengers waiting at bus stops can access a weatherproof computer terminal to find out when the next bus will arrive and what route that bus is taking. They can also check their email, use trip planning software to determine which bus routes to take, or swipe a credit card to purchase tickets. John Domblides, who works for Portmouth’s Traffic Systems Group, says, “The response from the public using the new facilities has been very positive, largely due to the quality of both the information displayed and the infrastructure used—stainless-steel and glass bus shelters with bright displays.”13 The initial cost was £3.2 million or about $6 million, and the annual cost is £200,000 or $370,000. As Portsmouth’s bus system demonstrates, information is useful when it is 2.1 accurate, 2.2 complete, 2.3 relevant, and 2.4 timely. However, there can be significant 2.5 acquisition, 2.6 processing, 2.7 storage, 2.8 retrieval, and 2.9 communication costs associated with useful information.
2.1 Accurate Information Information is useful when it is accurate. Before relying on information to make decisions, you must know that the information is correct. For example, almost 200,000 times a year, hospitals give patients the wrong medicine. Although most of those errors are caught before the patient takes the medicine, 1.7 percent of the time lifesaving measures must be taken to correct for those mistakes.14 Yet, when the University of Illinois at Chicago Medical Center began using a computerized physician order entry system, treatment mistakes, particularly adverse drug events in which patients receive the wrong medicine
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or an incorrect dosage of the right medicine, were reduced by an amazing 55 percent. Why? Instead of being scrawled in doctors’ illegible handwriting, prescription orders are typed under the new system, so the instructions are far more accurate. Because the system also checks for and prevents harmful drug interactions, order errors were ultimately reduced by 86 percent.15
2.2 Complete Information Information is useful when it is complete. Incomplete or missing information makes it difficult to recognize problems and identify potential solutions. For example, dispatchers at Con-Way Central Express are responsible for choosing truck routes that maximize trailer loads, minimize expenses (time, miles, and fuel), and get drivers home as soon as possible. On a typical day, Con-Way’s dispatchers must consider the number of trucks (2,100) and available drivers (varies), locations (200 across 25 states), shipments (typically 50,000), and the tonnage and trailer capacity for that day. Though Con-Way’s dispatchers do extremely well, they typically have only 85 percent of the information they need. Because they lack information about last-minute changes in orders, weather, accidents, driver no-shows, and breakdowns, they end up assigning longer, less efficient truck routes with less than full trucks that ultimately increase costs by $5 million per year.16
2.3 Relevant Information You can have accurate, complete information, but if it doesn’t pertain to the problems you’re facing, then it’s irrelevant and not very useful. Con-Way Express dispatchers not only lacked complete information, they also lacked relevant information about their problems. To address these issues, the company spent $3 million over five years to build a computerized truck route optimization system. This system tracks all customer shipment requests (which can be made as late as 5:15 P.M. each day) and communicates by satellite with each truck to monitor truck availability, loads, miles, fuel, weather, and accidents. Then, armed with all of this relevant information, it cranks out optimal truck routes in just seven minutes. On an average day, this system allows Con-Way to use 111 fewer trucks and 68 fewer drivers, drive 26,000 fewer miles, and increase the load in each truck by 370 revenue-generating pounds. Route optimization analyst Marty Robinson says, “It saves us a lot of time each night, which we use to make sure we’ve got accurate order information, look into problems and handle changes.”17
2.4 Timely Information PITNEY BOWES, INC./ILLUSTRATOR: ROB KELLY
One of the key criteria for useful information is that it be timely. This humorous ad for Pitney-Bowes conveys that fact with a simple tag line, “The British Were Here!”
Finally, information is useful when it is timely. To be timely, the information must be available when needed to define a problem or to begin to identify possible solutions. If you’ve ever thought, “I wish I had known that earlier,” then you understand the importance of timely information and the opportunity cost of not having it. For instance, Health Decisions is a company that designs and runs clinical drug-testing trials for pharmaceutical companies. To provide timely access to study results, it records data using specially designed bubble forms (like multiple-choice test Scantrons).
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By scanning a form every second, the company can read up to 8,000 per day— entering the same amount of data by hand would take months. This allows medical clinics and labs to verify and correct their data just four days after sending the data to Health Decisions. By contrast, the industry average is 122 days. How much does this matter? A Health Decisions study of a potential Alzheimer’s drug based on 450,000 pages of data was completed in three and a half years rather than seven. Although the Food and Drug Administration did not approve the drug, completing the research so quickly saved the pharmaceutical company three and a half years and $32 million in additional expenses that it was able to put toward the development of another drug.18
2.5 Acquisition Costs
2.6 Processing Costs Companies often have massive amounts of data, but not in the form or combination they need. Consequently, processing cost is the cost of turning raw data into usable information. For example, Celanese, a $4.5 billion chemical company, has 12,000 employees in 30 facilities in 11 countries that use 13 different computer systems that can’t “talk” to each other or share data. Celanese’s chief information officer (CIO) Karl Wachs said, “Top management calls this inefficiency. The lower guys [in the company] call it stupidity.”20 Therefore, over a two-year period, Celanese expected to spend at least $60 million and as much as $146 million to integrate these 13 incompatible systems into one.
HE RIGHT TH G T I NG IN DO
Acquisition cost is the cost of obtaining data that you don’t have. For example, acquisition cost among other things, Acxiom, a billion-dollar company, gathers and processes The cost of obtaining data that you data for direct-mail marketing companies. If you’ve received an unsolicited, don’t have. “preapproved” credit card application recently (and who hasn’t?), chances are processing cost Acxiom helped the credit card company gather information about you. Where The cost of turning raw data into does Acxiom get that information? The first place it turns is to companies that usable information. sell consumer credit reports at a wholesale cost of $1 each. Acxiom also obtains information from retailers. Each time you use your credit card, retailers’ checkout scanners gather information about your spending habits and product preferences. Many retailers sell this information to companies like Acxiom that use it for market research. So why pay for this information? The reason is that acquiring it RECYCLING AND DISPOSING OF COMPUTER can help credit card companies do a better job of identifying EQUIPMENT who will mail back a signed credit card application and who With most companies replacing computers will rip the credit card application in half and toss it in the every four years, an estimated 250 million 19 trash. computers will be discarded over the next five years. Computers and computer monitors contain hazardous materials, however, so you can’t just toss them in the trash. Doing that is not just wrong—it’s against the law. Instead, contact your state’s department of environmental protection for help in finding a recycling company. Or, donate your old computers to deserving individuals or charitable organizations. Or, sell the computers at a steep discount to your employees. And, when you buy your new corporate computers, bargain with the vendor to make it responsible for recycling those computers the next time around.21
2.7 Storage Costs Storage cost is the cost of physically or electronically archiving information for
storage cost
later use and retrieval. One of the reasons that credit card companies and other Fortune 500 companies hire Acxiom is that it maintains a database of the following information on over 250 million Americans: age, estimated income, home ownership, cars owned, occupation, children, number of credit cards, and more. All of that information, between 1.5 and 2 petabytes (a petabyte is 2,000 terabytes, and a terabyte is the same as 500 million pages of single-spaced text), is cleaned, transformed from data to information, and then stored in Acxiom’s massive, secure, underground “data warehouses” in Little Rock, Arkansas, Downer’s Grove, Illinois, and Sunderland, England.22 Besides its own data,
The cost of physically or electronically archiving information for later use and retrieval.
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Acxiom stores an additional 20 billion customer and prospect (i.e., potential customer) records for its 1,000 corporate clients. Acxiom’s CEO says, “We like to think that these [corporate] customers look at the Acxiom data center as an extension of their own data centers.”23
2.8 Retrieval Costs retrieval cost The cost of accessing already-stored and processed information.
Retrieval cost is the cost of accessing already-stored and processed information. One of the most common misunderstandings about information is that it is easy and cheap to retrieve once the company has it. Not so. First, you have to find the information. Then, you’ve got to convince whoever has it to share it with you. Then the information has to be processed into a form that is useful for you. By the time you get the information you need, it may not be timely anymore. Before the University of Illinois at Chicago Medical Center switched to the electronic physician order system described above, doctors resisted the change, fearing that the new system would slow them down (i.e., high retrieval costs). Dr. Patrick Tranmer said, “I have a maximum of 20 minutes to do everything when I see a patient. I have to find out what’s wrong, get their history, do a physical exam, make a phone call, write a prescription, instruct the patient, make a follow-up appointment and then educate a student doctor about what I’ve just done.”24 The doctors were pleasantly surprised to find that the new system actually reduced retrieval costs. Before the new system, doctors and nurses used to waste time tracking down patient information. Now, when X-rays and lab reports are completed, they are immediately available for review at any computer in the hospital. When doctors noticed that it only took nurses 1 minute (rather than 10) to obtain these medical records, they started retrieving the X-rays and lab reports themselves, freeing nurses to spend more time attending to patients.25 Overall, the new system saves physicians 130,000 hours a year.
2.9 Communication Costs communication cost
Communication cost is the cost of transmitting information from one place to
The cost of transmitting information from one place to another.
another. For example, the most important information that an electric utility company collects each month is the information from the electric meter attached to the side of your house. Traditionally, electric companies employed meter readers to walk from house to house to gather information that would then be entered into company computers. Now, however, meter readers are losing their jobs to water, gas, and electric meters built with radio frequency (RF) transmitters (see Section 3.1 for more on this technology). The transmitters turn on when a meter reader drives by the house in a utility company van with a laptop computer that is specially equipped to receive the RF signals. Such a van, traveling at legal speeds, can read 12,000 to 13,000 meters in an eight-hour day. By contrast, a meter reader on foot would record data from 500 meters per day.26 The Niagara Mohawk utility company in New York is spending $100 million over three years to install 2 million meters with RF transmitters, but expects to save $15 to $20 million a year in communication costs once they’re installed.
Review 2: Characteristics and Costs of Useful Information Raw data are facts and figures. Raw data do not become information until they are in a form that can affect decisions and behavior. For information to be useful, it has to be reliable and valid (accurate), of sufficient quantity (complete), pertinent to the problems you’re facing (relevant), and available when you need it (timely). Useful information does not come cheaply. The five costs of obtaining good information are the costs of acquiring, processing, storing, retrieving, and communicating information.
Chapter 17: Managing Information
Getting and Sharing Information In 1907, Metropolitan Life Insurance built a huge office building in New York City for its brand new, state-of-the-art information technology system. What was this great breakthrough in information management? The advanced system was card files. That’s right, the same card file systems that every library in America used before computers. Metropolitan Life’s information “technology” consisted of 20,000 separate file drawers that sat in hundreds of file cabinets more than 15 feet tall. This filing system held 20 million insurance applications, 700,000 accounting books, and 500,000 death certificates. Metropolitan Life employed 61 workers who did nothing but sort, file, and climb ladders to pull files as needed.27 Less than a century later, the cost, inefficiency, and ineffectiveness of using this formerly state-of-the-art system would put an insurance company out of business within months. Today, if storms, fire, or accidents damage policyholders’ property, insurance companies write checks on the spot to cover the losses. When policyholders buy a car, they call their insurance agent from the dealership to activate their insurance before driving off in their new car. And now, insurance companies are marketing their products and services to customers directly from the Internet. From card files to Internet files in just under a century, the rate of change in information technology is spectacular. After reading the next two sections, you should be able to 3 explain the basics of capturing, processing, and protecting information. 4 describe how companies can access and share information and knowledge. 3
CAPTURING, PROCESSING, AND PROTECTING INFORMATION
When you go to your local Rite Aid pharmacy to pick up a prescription, the pharmacist reviews an electronic file that shows all of the medications you’re taking. That same system automatically checks to make sure that your new prescription won’t create adverse side effects by interacting with your other medications. When you pay for your prescription, Rite Aid’s point-of-sale information system determines whether you’ve written any bad checks lately (to Rite Aid or other stores), records your payment, and then checks with the computer of the pharmaceutical company that makes your prescription drugs to see if it’s time to reorder. Finally, Rite Aid protects your information to make sure that your data are readily available only to you, your physician, and your pharmacist. In this section, you will learn about the information technologies that companies like Rite Aid use to 3.1 capture, 3.2 process, and 3.3 protect information.
3.1 Capturing Information There are two basic methods of capturing information: manual and electronic. Manual capture of information is a labor-intensive process, which entails recording and entering data by hand into a data storage device. For example, when you applied for a driver’s license, you probably recorded personal information about yourself by filling out a form. Then, after you passed your driver’s test, someone typed your handwritten information into the department of motor vehicles’ computer database so that local and state police could access it from their patrol cars when they pulled you over for speeding. (Isn’t information great?) The problem with manual capture of information is that it is slow, expensive, and often inaccurate.
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AP PHOTO/DONNA McWILLIAM
Consequently, companies are relying more on electronic capture, in which data are electronically recorded and entered into electronic storage devices. Bar codes, radio frequency identification tags, and document scanners are methods of electronically capturing data. Bar codes represent numerical data by varying the thickness and pattern of vertical bars. The primary advantage that bar codes offer is that the data they represent can be read and recorded in an instant with a handheld or pen-type scanner. One pass of the scanner (okay, sometimes several) and “beep!” The information has been captured. Bar codes cut checkout times in half, reduce data entry errors by 75 percent, and save stores money because stockers don’t have to go through the labor-intensive process of putting a price tag on each item in the store.28 Radio frequency identification (RFID) tags contain minuscule microchips and antennas that transmit information via radio waves.29 Unlike bar codes, which require direct line-of-sight scanning, RFID tags are read by turning on an RFID reader that, like a radio, tunes into a specific frequency to determine the number and location of products, parts, or anything else to which the RFID tags are attached. Turn on an RFID reader, and every RFID tag within the reader’s range (from several hundred to several thousand feet) is accounted for. For example, Sky Chefs, the company that prepares onboard meals for the airlines, uses RFID tags to keep track of the $1,000 heavy-duty serving carts used to wheel hot meals up and down crowded airplane aisles. With airlines losing or misplacing up to 1,500 carts per month, Sky Chefs found that installing RFID readers throughout airports and attaching RFID tags to serving carts was an easy, inexpensive way to locate and recover all of its carts.30 And with RFID readers able to process 96 RFID tags per second, it takes Sky Chefs only a couple of minutes to determine the locations. RFID tags vary in cost from 25 cents to $5 per tag, depending on their capabilities and the amount of information they can store and send.31 Because they are inexpensive and easy to use, electronic scanners, which convert printed text and pictures into digital images, have become an increasingly popular method of electronically capturing data. The first requirement for a good scanner is a document feeder that automatically feeds document pages into the scanner or turns the pages (often with a puff of air) when scanning books or bound documents.32 Text that has been digitized cannot be searched or edited like the regular text in your word processing software, however, so the second requirement for a good scanner is optical character recognition software to scan and convert original or digitized documents into ASCII text (American Standard Code for Information Interchange) or Adobe PDF documents. ASCII text can be searched, read, and edited with standard word processing, email, desktop publishing, database management, and spreadsheet software, whereas PDF documents can be searched and edited with Adobe’s Acrobat software. Sloans Lake Managed Care, a Colorado health-care organization, uses scanners and optical character recognition software to read the medical claims forms submitted by the 450,000 people covered by its health plan. Sloans Lake can scan 450 to 500 characters per form with 98 percent accuracy. As a result, it now automatically scans and processes over 5,000 claims forms per day and has lowered the time for processing claims by an average of 65 percent.33
RFID technology is in use at this Carrollton, Texas loading dock. Boxes equipped with RFID tags speed along a conveyor belt and are recorded by the computer workstation. The system eliminates the need for workers to scan every box with a handheld device and so is more accurate.
bar code A visual pattern that represents numerical data by varying the thickness and pattern of vertical bars.
radio frequency identification (RFID) tags Tags containing minuscule microchips that transmit information via radio waves and can be used to track the number and location of the objects into which the tags have been inserted.
electronic scanner An electronic device that converts printed text and pictures into digital images.
optical character recognition The ability of software to convert digitized documents into ASCII text (American Standard Code for Information Interchange) that can be searched, read, and edited by word processing and other kinds of software.
3.2 Processing Information processing information Transforming raw data into meaningful information.
Processing information means transforming raw data into meaningful information that can be applied to business decision making. Evaluating sales data to determine the best- and worst-selling products, examining repair records to
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determine product reliability, and monitoring the cost of long-distance phone calls are all examples of processing raw data into meaningful information. And, with automated, electronic capture of data, increased processing power, and cheaper and more plentiful ways to store data, managers no longer worry about getting data. Instead, they scratch their heads about how to use the overwhelming amount of data that pours into their businesses every day. Furthermore, most managers know little about statistics and have neither the time nor the inclination to learn how to use them to analyze data. One promising tool to help managers dig out from under the avalanche of data is data mining. Data mining is the process of discovering unknown patterns and relationships in large amounts of data.34 Data mining works by using complex algorithms such as neural networks, rule induction, and decision trees. If you don’t know what those are, that’s okay. With data mining, you don’t have to. Most managers only need to know that data mining looks for patterns that are already in the data but are too complex for them to spot on their own. For example, data mining helped a credit card company determine that people who fill out credit applications in pencil are much less likely to pay their credit card bills. It now scrutinizes those applications much more closely. Data mining also helped Victoria’s Secret find out that it sold 20 times more size 32 bras in New York City (no one is sure why) and that ivory bras were 10 times more popular in Miami than black bras. Because of these discoveries, Victoria’s Secret now customizes product inventory for each of its stores.35 Data mining typically splits a data set in half, finds patterns in one half, and then tests the validity of those patterns by trying to find them again in the second half of the data set. The data typically come from a data warehouse that stores huge amounts of data that have been prepared for data mining analysis by being cleaned of errors and redundancy. For example, earlier in the chapter you read about Acxiom, which has 1.5 to 2 petabytes of information in storage at its data warehouses. The data in a data warehouse can then be analyzed using two kinds of data mining. Supervised data mining usually begins with the user telling the data mining software to look and test for specific patterns and relationships in a data set. Typically, this is done through a series of “what if?” questions or statements. For instance, a grocery store manager might instruct the data mining software to determine if coupons placed in the Sunday paper increase or decrease sales. By contrast, with unsupervised data mining, the user simply tells the data mining software to uncover whatever patterns and relationships it can find in a data set. For example, State Farm Insurance used to have three pricing categories for car insurance, depending on your driving record: preferred for the best drivers, standard for typical drivers, and nonstandard for the worst drivers. Now, however, it has moved to “tiered pricing” based on the 300 different kinds of driving records that its data mining software was able to discover. This allows State Farm to be much more precise in matching 300 different price levels to 300 different kinds of driving records.36 Unsupervised data mining is particularly good at identifying association or affinity patterns, sequence patterns, and predictive patterns. It can also identify what data mining “techies” call data clusters.37 Association or affinity patterns occur when two or more database elements tend to occur together in a significant way. Surprisingly, Osco Drugs, based in Chicago, found that beer and diapers tended to be bought together between 5 and 7 P.M. The question, of course, was “why?” The answer, on further review, was fairly straightforward: fathers, who were told by their wives to buy some diapers on their way home, decided to pick up a six-pack for themselves, too.38 Likewise, because Wal-Mart’s data mining indicated that people tend to buy bananas and cereal at the same time, Wal-Mart now places bananas near the cereal aisle, in addition to the fruits and vegetables aisle.39 Sequence patterns occur when two or more database elements occur together in a significant pattern, but with one of the elements preceding the other. When TWA
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data mining The process of discovering unknown patterns and relationships in large amounts of data.
data warehouse Stores huge amounts of data that have been prepared for data mining analysis by being cleaned of errors and redundancy.
supervised data mining The process when the user tells the data mining software to look and test for specific patterns and relationships in a data set.
unsupervised data mining The process when the user simply tells the data mining software to uncover whatever patterns and relationships it can find in a data set.
association or affinity patterns When two or more database elements tend to occur together in a significant way.
sequence patterns When two or more database elements occur together in a significant pattern, but one of the elements precedes the other.
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predictive patterns Patterns that help identify database elements that are different.
data clusters When three or more database elements occur together (i.e., cluster) in a significant way.
announced a low $360 round-trip ticket between Los Angeles and San Juan, Puerto Rico, Travelocity.com, one of the largest Web travel companies used data mining to identify the customers most likely to buy a discounted ticket. A sequence pattern allowed managers to target all the customers in the area who had already used Travelocity’s Web site to investigate fares to San Juan. In other words, people who had previously inquired about fares for this route (step 1) would be more likely to buy the discounted fare (step 2) if they knew about it. Indeed, an amazing 25 percent of the 30,000 customers Travelocity notified either bought the discounted flight to Puerto Rico or another flight to the Caribbean.40 Predictive patterns are just the opposite of association or affinity patterns. Whereas association or affinity patterns look for database elements that seem to go together, predictive patterns help identify database elements that are different. On the day after Thanksgiving, typically the busiest shopping day of the year, Wal-Mart’s data mining indicated that sales were unexpectedly slow for a boxed computer and printer combination that was offered at an extremely good price. Sales were slow everywhere, except one Wal-Mart store where sales greatly exceeded expectations. After noting the difference, headquarters called the store manager who said that the products were displayed in an open box that made it clear to customers that the low price was for the computer and the printer. Sales took off at all stores after headquarters relayed this simple message, “Open the box.”41 Data clusters are the last kind of pattern found by data mining. Data clusters occur when three or more database elements occur together (i.e., cluster) in a significant way. For example, after analyzing several years worth of repair and warranty claims, Ford might find that, compared to cars built in its Chicago plant, the cars it builds in Atlanta (first element) are more likely to have problems with overtightened fan belts (second element) that break (third element) and result in overheated engines (fourth element), ruined radiators (fifth element), and payments for tow trucks (sixth element), which are paid for by Ford’s three-year, 36,000 mile warranty. Traditionally, data mining has been very expensive and very complex. Today, however, data mining services and analysis are much more affordable and within reach of most companies’ budgets. And, if it follows the path of most technologies, it will become even easier and cheaper to use in the future.
3.3 Protecting Information protecting information The process of ensuring that data are reliably and consistently retrievable in a usable format for authorized users, but no one else.
Protecting information is the process of ensuring that data are reliably and consistently retrievable in a usable format for authorized users, but no one else. For instance, when customers purchase prescription medicine at Drugstore.com, an online drugstore and health-aid retailer, they want to be confident that their medical and credit card information is available only to them, the pharmacists at Drugstore.com, and their doctors. In fact, Drugstore.com has an extensive privacy policy (click “Privacy Policy” at http://www.drugstore.com) to make sure this is the case. Companies like Drugstore.com find it necessary to protect information because of the numerous security threats to data and data security listed in Exhibit 17.3. People inside and outside companies can steal or destroy company data in various ways including denial-of-service Web server attacks that can bring down some of the busiest and best-run sites on the Internet; viruses and spyware/adware that spread quickly and can result in data loss and business disruption; keystroke monitoring in which every mouse click and keystroke you make is unknowingly monitored, stored, and sent to unauthorized users; password cracking software that steals supposedly secure passwords; and phishing, where fake, but reallooking emails and Web sites trick users into sharing personal information (user names, passwords, account numbers, etc.) that leads to unauthorized account access. Indeed, on average, 19 percent of computers are infected with viruses,
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Exhibit 17.3 Security Problem
Source
Affects
Severity
The Threat
The Solution
Denial of service, Web server attacks, and corporate network attacks
Internet hackers
All servers
High
Loss of data, disruption of service, and theft of service
Implement firewall, password control, serverside review, threat monitoring, and bug fixes, and turn PCs off when not in use.
Password cracking software and unauthorized access to PCs
Local area network, Internet
All users, especially digital subscriber line and cable Internet users
High
Hackers take over PCs. Privacy can be invaded. Corporate users’ systems are exposed to other machines on the network.
Close ports and firewalls, disable file and print sharing, and use strong passwords.
Viruses, worms, Trojan horses, and rootkits
Email, downloaded and distributed software
All users
Moderate to high
Monitor activities and cause data loss and file deletion: compromise security by sometimes concealing their presence.
Use antivirus software and firewalls, and control Internet access.
Spyware, adware, malicious scripts and applets
Rogue Web pages
All users
Moderate to high
Invade privacy, intercept passwords, and damage files or file system.
Disable browser script support, and use security, blocking, and spyware/ adware software.
Email snooping
Hackers on your network and the Internet
All users
Moderate to high
People read your email from intermediate servers or packets, or they physically access your machine.
Encrypt message, ensure strong password protection, and limit physical access to machines.
Keystroke monitoring
Trojan horses, people with direct access to PCs
All users
High
Records everything typed at the keyboard and intercepts keystrokes before password masking or encryption occurs.
Use antivirus software to catch Trojan horses, control Internet access to transmission, and implement system monitoring and physical access control.
Phishing
Hackers on your network and the Internet
All users, including customers
High
Fake, but real-looking emails and Web sites that trick users into sharing personal information on what they wrongly thought was the company’s
Educate and warn users and customers about the dangers. Encourage both not to click on potentially fake (Continued)
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Exhibit 17.3 (continued) Security Problem
Source
Affects
Severity
The Threat
The Solution
Web site. This leads to unauthorized account access.
URLs, which might take them to phishing Web sites. Instead, have them type your company’s URL into the Web browser.
Spam
Email
All users and corporations
Mild to high
Clogs and overloads email servers and inboxes with junk mail. HTML-based spam may be used for profiling and identifying users.
Filter known spam sources and senders on email servers, and have users create further lists of approved and unapproved senders on their personal computers.
Cookies
Web sites you visit
Individual users
Mild to moderate
Trace Web usage and permit the creation of personalized Web pages that track behavior and interest profiles.
Use cookie managers to control and edit cookies, and use ad blockers.
Sources: K. Bannan, “Look Out: Watching You, Watching Me,” PC Magazine, July 2002, 99; A. Dragoon, “Fighting Phish, Fakes, and Frauds,” CIO, 1 September 2004, 33; B. Glass, “Are You Being Watched?” PC Magazine, 23 April 2002, 54; K. Karagiannis, “DDoS: Are You Next?” PC Magazine, January 2003, 79; B. Machrone, “Protect & Defend,” PC Magazine, 27 June 2000, 168–181.
Exhibit 17.3 Security Threats to Data and Data Networks
authentication Making sure potential users are who they claim to be.
authorization Granting authenticated users approved access to data, software, and systems.
two-factor authentication Authentication based on what users know, such as a password, and what they have in their possession, such as a secure ID card or key.
80 percent have spyware, and only one-third are running behind a protected firewall (see below). Studies show that the threats listed in Exhibit 17.3 are so dire that automatic attacks will begin on an unprotected computer just 15 seconds after it goes live on the Internet.42 As shown in the right-hand column of Exhibit 17.3, numerous steps can be taken to secure data and data networks. Some of the most important are authentication and authorization, firewalls, antivirus software for PCs and email servers, data encryption, and virtual private networks.43 We will review those steps and then finish this section with a brief review of the dangers of wireless networks, which are exploding in popularity. Two critical steps are required to make sure that data can be accessed by authorized users and no one else. One is authentication, that is, making sure users are who they claim to be.44 The other is authorization, that is, granting authenticated users approved access to data, software, and systems.45 For example, when an ATM prompts you to enter your personal identification number (PIN), the bank is authenticating that you are you. Once you’ve been authenticated, you are authorized to access your funds and no one else’s. Of course, as anyone who has lost a PIN or password or had one stolen knows, user authentication systems are not foolproof. In particular, users create security risks by not changing their default account passwords (such as birth dates) or by using weak passwords such as names (“Larry”) or complete words (“football”) that are quickly guessed by password cracker software.46 (See the Doing the Right Thing about “Password Dos and Don’ts” to learn how to prevent this.) This is why many companies are now turning to two-factor authentication, which is based on what users know, such as a password, and what they have,
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such as a secure ID card. For example, employees at Bloomberg, a global provider of business news, data, and analysis, must enter a password, such as a four-digit personal identification number, plus a secure number that changes every 60 seconds and is displayed on the tiny screen of the secure electronic ID (about the size of a pack of gum) they carry. For these same reasons, some companies are turning to biometrics for authentication. With biometrics such as fingerprint recognition or iris scanning, users are identified by unique, measurable body features.47 Troy Appling, vice president of The Bankers Bank, says, “With fingerprint biometrics, we can reduce the risk of unauthorized people making millions of dollars off fraudulent transfers. And we don’t have to spend up to 60 percent of our IT [information technology] time resolving lost or forgotten passwords.”48 Of course, since some fingerprint scanners can be fooled by fingerprint molds, some companies take security measures even further by requiring users to simultaneously scan their fingerprint and insert a secure, smart card containing a digital file of their fingerprint. This is another form of two-factor authentication. Unfortunately, stolen or cracked passwords are not the only way for hackers and electronic thieves to gain access to an organization’s computer resources. Unless special safeguards are put in place, every time corporate users are online there’s literally nothing between their personal computers and the Internet (home users with high-speed DSL or cable Internet access face the same risks). Hackers can access files, run programs, and control key parts of computers if precautions aren’t taken. To reduce these risks, companies use firewalls, hardware or software devices that sit between the computers in an internal organizational network and outside networks, such as the Internet. Firewalls filter and check incoming and outgoing data. They prevent company insiders from accessing unauthorized sites or from sending confidential company information to people outside the company. Firewalls also prevent outsiders from identifying and gaining access to company computers and data. Indeed, if a firewall is working properly, the computers behind the company firewall literally cannot be seen or accessed by outsiders. A virus is a program or piece of code that, against your wishes, attaches itself to other programs on your computer and can trigger anything from a harmless flashing message to the reformatting of your hard drive to a systemwide network shutdown.49 You used to have to do or run something to get a virus, such as double-clicking an email attachment or booting your computer from an infected floppy disk. Today’s viruses are much more threatening. In fact, with some viruses, just being connected to a network can infect your computer.50 Antivirus software for personal computers scans email, downloaded files, and computer hard drives, disk drives, and memory to detect and stop computer viruses from doing damage. However, this software is effective only to the extent that users of individual computers have and use up-to-date versions. With new viruses appearing all the time, users should update their antivirus software weekly or, even better, configure their virus software to automatically check for, download, and install updates. By contrast, corporate antivirus software automatically scans email attachments, such as Microsoft Word documents, graphics, or text files, as they come across the company email server. It also monitors and scans all file downloads across company databases and network servers. So, while antivirus software for personal computers prevents individual computers from being infected, corporate antivirus software for email servers, databases, and network servers adds another layer of protection by preventing infected files from multiplying and being sent to others. Another way of protecting information is to encrypt sensitive data. Data encryption transforms data into complex, scrambled digital codes that can be unencrypted only by authorized users who possess unique decryption keys. One method of data encryption is to use products by PGP (Pretty Good Privacy) (http://www.pgp.com) to encrypt the files stored on personal computers or
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biometrics Identifying users by unique, measurable body features, such as fingerprint recognition or iris scanning.
firewall A protective hardware or software device that sits between the computers in an internal organizational network and outside networks, such as the Internet.
virus A program or piece of code that, against your wishes, attaches itself to other programs on your computer and can trigger anything from a harmless flashing message to the reformatting of your hard drive to a systemwide network shutdown.
data encryption The transformation of data into complex, scrambled digital codes that can be unencrypted only by authorized users who possess unique decryption keys.
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RIGHT T HIN G THE N I G DO
network servers and databases. This is especially important with laptop computers, which are easily stolen. And, with people PASSWORD DOS AND DON’TS increasingly gaining unauthorized access to email messages— Anyone with access to sensitive personal email snooping—it’s also important to encrypt sensitive email (personnel or medical files), customer messages and file attachments. You can use a system called (credit cards), or corporate data (costs) “public key encryption” to do so. First, give copies of your has a clear responsibility to protect those data from unauthorized access. Use the “public key” to anyone who sends you files or email. Have the following dos and don’ts to maintain a sender use the public key, which is actually a piece of software, “strong” password system and protect to encrypt files before sending them to you. The only way to your data. decrypt the files is with a companion “private key” that you • Don’t use any public information such keep to yourself. If you want to learn more or want to begin as part of your name, address, or birth encrypting your own files, download a free copy of Pretty date to create a password. Good Privacy from http://web.mit.edu/pgp.51 • Don’t use complete words, English or Although firewalls can protect personal computers and foreign, that are easily guessed by network servers connected to the corporate network, people password software using “dictionary away from their offices (e.g., salespeople, business travelers, attacks.” • Use eight or more characters and intelecommuters who work at home) who interact with their clude some unique characters such as company networks via the Internet face a security risk. Because !@#$ to create passwords like Internet data are not encrypted, packet sniffer software (see “cow@#boy.” Exhibit 17.3) easily allows hackers to read everything sent or • The longer the password and the more received, except files that have been encrypted before sending. unique characters, the more difficult it Previously, the only practical solution was to have employees is to guess. dial in to secure company phone lines for direct access to the • Consider using “passphrases,” such company network. Of course, with international and longas “My European vacation starts July distance phone calls, the costs quickly added up. Now, virtual 8th,” instead of shorter passwords. The longer password, including upperprivate networks (VPNs) have solved this problem by using and lowercase letters, spaces, and software to encrypt all Internet data at both ends of the transmisnumbers, is easy to remember and sion process. Instead of making long-distance calls, employees much, much more difficult to guess usconnect to the Internet. But, unlike typical Internet connections ing password cracking software. in which Internet data packets are unencrypted, the VPN en• Remember your password and don’t crypts the data sent by employees outside the company write it down on a sticky note attached computer network, decrypts the data when they arrive within to your computer. the company network, and does the same when data are sent • Change your password every six back to the computer outside the network. weeks. Better yet, specify that your computer system force all users to Alternatively, many companies are now adopting Webchange their passwords this often. based secure sockets layer (SSL) encryption to provide secure • Don’t reuse old passwords. off-site access to data and programs. If you’ve ever entered Together, these basic steps can make it your credit card in a Web browser to make an online purchase, much more difficult to gain unauthorized you’ve used SSL technology to encrypt and protect that inforaccess to sensitive data.52 mation. SSL encryption is being used if a gold lock (Internet Explorer) or a gold key (Netscape) appears along the bottom of your Web browser. SSL encryption works the same way in the workplace. Managers and employees who aren’t at the office simply convirtual private network (VPN) nect to the Internet, open a Web browser, and then enter a user name and passSoftware that securely encrypts data sent by employees outside the word to gain access to SSL encrypted data and programs. For example, the company network, decrypts the data Catholic Health System of Buffalo, New York, uses an SSL system to allow rawhen they arrive within the company diologists to access and review medical images like X-rays from their homes. computer network, and does the same Likewise, lawyers at Sonnenschein, Nath & Rosenthal, a Chicago law firm, use when data are sent back to employees the Web and their SSL encrypted system to securely access case records from outside the network. anywhere in the world.53 SSL encryption is cheaper than VPNs, but it typically secure sockets layer (SSL) provides only limited access to data and files. By contrast, VPN connections, encryption though more expensive and troublesome to use, provide complete, secure access Internet browser-based encryption that to everything on a company’s network. provides secure off-site Web access to Finally, many companies now have wireless networks, which make it possisome data and programs. ble for anybody with a laptop and a wireless card to access the company network from anywhere in the office. Though wireless networks come equipped
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with security and encryption capabilities that, in theory, permit only authorized users to access the wireless network, those capabilities are easily bypassed with the right tools. Furthermore, for ease of installation, many wireless networks are shipped with their security and encryption capabilities turned off.54 Plus, although it’s better to have it turned on than off, be wary of the WEP (Wired Equivalent Privacy) security protocol, which is easily compromised. See http://www.wi-fi.org for the latest information on wireless security and encryption protocols that provide much stronger protection for your company’s wireless network.
Review 3: Capturing, Processing, and Protecting Information Electronic data capture (bar codes, radio frequency identification [RFID] tags, scanners, and optical character recognition) is much faster, easier, and cheaper than manual data capture. Processing information means transforming raw data into meaningful information that can be applied to business decision making. Data mining helps managers with this transformation by discovering unknown patterns and relationships in data. Supervised data mining looks for patterns specified by managers, while unsupervised data mining looks for four general kinds of data patterns: association/affinity patterns, sequence patterns, predictive patterns, and data clusters. Protecting information ensures that data are reliably and consistently retrievable in a usable format by authorized users, but no one else. Authentication and authorization, firewalls, antivirus software for PCs and corporate email and network servers, data encryption, virtual private networks, and Web-based secure sockets layer (SSL) encryption are some of the best ways to protect information. Be careful with wireless networks, which are easily compromised even when security and encryption protocols are in place. 4
ACCESSING AND SHARING INFORMATION AND KNOWLEDGE
Simplest-shop.com sells a multitude of books, cameras, computers, DVDs, electronics, games, music, software, toys, and videos. Clicking on “DVD” brings up the 10 best-selling titles and the possibility of searching for 3,000 others. The page for each DVD (and every other product) lists customer advice, such as “recommended by 80 percent of our customers”; shares specific customer comments, such as “Charlie and the Chocolate Factory is a quirky but fun adaptation of Roald Dahl’s classic children’s tale”; and typically lists two or three different prices and places from which to order. Amazingly, with tens of thousands of products, this entire Web site and business is run by just one person, Calin Uioreanu, a software engineer from Munich, Germany. How can Uioreanu run this business by himself? He uses Web services, a growing Internet technology that allows him to tie directly into Amazon.com’s back-office resources. All of the product descriptions, pictures, and customer comments and feedback ratings on Simplest-shop.com come straight from Amazon.com, which also verifies credit cards and arranges for shipping. Uioreanu uses Web services software to connect his Simplest-shop.com server to Amazon’s servers for continuous information updates. The advantage for Amazon.com is that it has another Web site for selling its goods. The advantage for consumers is that they can buy many items directly from either Simplest-shop.com or Amazon.com, whichever is cheaper. The advantage for Calin Uioreanu is that he can run a huge Web business that sells over 50,000 products all by himself. According to Uioreanu, without Web services and the ability to share information from Amazon.com, “it would have been 10 times more difficult to do.”55 Today, information technologies are letting companies communicate, share, and provide data access to workers, managers, suppliers, and customers in ways that were
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unthinkable just a few years ago. After reading this section, you should be able to explain how companies use information technology to improve 4.1 internal access and sharing of information, 4.2 external access and sharing of information, and 4.3 the sharing of knowledge and expertise.
4.1 Internal Access and Sharing
executive information system (EIS) A data processing system that uses internal and external data sources to provide the information needed to monitor and analyze organizational performance.
intranets Private company networks that allow employees to easily access, share, and publish information using Internet software.
corporate portals A hybrid of executive information systems and intranets that allow managers and employees to use a Web browser to gain access to customized company information and to complete specialized transactions.
Executives, managers, and workers inside the company use three kinds of information technology to access and share information: executive information systems, intranets, and portals. An executive information system (EIS) uses internal and external sources of data to provide managers and executives the information they need to monitor and analyze organizational performance.56 The goal of an EIS is to provide accurate, complete, relevant, and timely information to managers. Managers at Lands’ End, the Web/mail-order company, use their EIS, which they call their “dashboard,” to see how well the company is running. With just a few mouse clicks and basic commands such as find, compare, and show, the EIS displays costs, sales revenues, and other kinds of data in color-coded charts and graphs. Managers can drill down to view and compare data by region, state, time period, and product. Frank Giannantonio, Lands’ End’s CIO says, “Our dashboards include an early alert system that utilizes key performance metrics to target items selling faster than expected and gives our managers the ability to adjust product levels far earlier than they were able to do in the past.”57 Exhibit 17.4 describes the capabilities of two of the best-selling products that companies use for EIS programs. Intranets are private company networks that allow employees to easily access, share, and publish information using Internet software. Intranet Web sites are just like external Web sites, but the firewall separating the internal company network from the Internet permits only authorized internal access.58 Companies typically use intranets to share information (e.g., about benefits) and to replace paper forms with online forms. At IBM, however, the company intranet is used for electronic meetings, instant messaging, online libraries of policies and procedures, distance learning and training, online reimbursement of travel expenses, and travel schedules and reservations. As a result, 4,800 electronic meetings are held each month, one million instant message discussions are held each day, and 40 percent of company training is done online.59 With 300,000 employees in 164 countries, the company’s travel savings from online training have been huge. IBM’s Jeanette Barlow says, “We saved between $4 million and $5 million a month not paying for travel.”60 Exhibit 17.5 further explains why companies use intranets. Finally, corporate portals are a hybrid of executive information systems and intranets. While an EIS provides managers and executives with the information they need to monitor and analyze organizational performance, and intranets help companies distribute and publish information and forms within the company, corporate portals allow company managers and employees to access customized information and complete specialized transactions using a Web browser.61 For example, Maysteel, which makes components for electronics and electric utilities, created a corporate portal to allow plant managers at its six factories in Wisconsin and Ireland to track and enter information regarding the quality of component parts. Now, with several quick clicks via their Web browsers, each plant manager can compare costs and quality to Maysteel’s other manufacturing facilities. Whereas an EIS or intranet typically can’t handle transactions, a corporate portal can. Jet engine manufacturer Pratt & Whitney’s corporate portal enables its engineers to track and charge their time to various projects. Previously, engineers had to be in the office directly connected to the company network to use the tracking and charging software system. Now,
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EASE OF USE
ANALYSIS OF INFORMATION
IDENTIFICATION OF PROBLEMS AND EXCEPTIONS
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Few commands to learn.
Simply drag-and-drop or point-and-click to create charts and tables or get the information you need.
Important views saved.
Need to see weekly sales by store every Monday? Save that “view” of the data, and it will automatically be updated with new data every week.
3-D charts to display data.
Column, square, pie, ring, line, area, scatter, bar, cube, etc.
Geographic dimensions.
Different geographic areas are automatically color-coded for easy understanding.
Sales tracking.
Track sales performance by product, region, account, and channel.
Easy-to-understand displays.
Information is displayed in tabular and graphical charts.
Time periods.
Data can be analyzed by current year, prior year, year to date, quarter to date, and month to date.
Compare to standards.
Compares actual company performance (actual expenses versus planned expenses, or actual sales by sales quotas).
Trigger exceptions.
Allows users to set triggers (5 percent over budget, 3 percent under sales quota), which then highlight negative exceptions in red and positive exceptions in green.
Drill down.
Once exceptions have been identified, users can drill down for more information to determine why the exception is occurring.
Detect & alert newspaper.
When things go wrong, the EIS delivers a “newspaper” via email to alert managers to problems. The newspaper offers an intuitive interface for easily navigating and further analyzing the alert content.
Detect & alert robots.
Detect & alert robots keep an extra “eye” out for events and problems. Want to keep an eye out for news about one of your competitors? Use a news robot to track stories on Dow Jones News Retrieval. Robots can also be used to track stock quotes, internal databases, and email messages.
Sources: “Business Intelligence: Overview: Enterprise Services from Pilot Software,” Accrue Software, [Online] available at http://www.pilotsw.com/Products/Accrue_Pilot_Suite/business_intelligence.html, 9 February 2002; Comshare home page, [Online] available at http://www.comshare.com/, February 2002.
Exhibit 17.4 Characteristics of Best-Selling Executive Information Systems
when the engineers travel to work with customers, Pratt & Whitney’s corporate portal permits them to track and charge their time from anywhere via a Web browser.62
4.2 External Access and Sharing Historically, companies have been unable or reluctant to let outside groups have access to corporate information. Now, however, a number of information technologies—electronic data interchange, extranets, Web services, and the Internet—are making it easier to share company data with external groups like suppliers and customers. They’re also reducing costs, increasing productivity by eliminating manual information processing (70 percent of the data output from one company, like a purchase order, ends up as data input at another company, such as a sales invoice or shipping order), reducing data entry errors, improving customer service, and speeding communications. As a result, managers are scrambling to adopt these technologies. With electronic data interchange, or EDI, two companies convert purchase and ordering information to a standardized format to enable direct electronic
electronic data interchange (EDI) When two companies convert their purchase and ordering information to a standardized format to enable the direct electronic transmission of that information from one company’s computer system to the other company’s computer system.
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transmission of that information from one company’s computer system to the other company’s system. For • Intranets increase efficiencies and reduce costs. example, when a Wal-Mart checkout clerk drags a • Intranets are intuitive and easy to use (Web-based). CD across the checkout scanner, Wal-Mart’s computerized inventory system automatically reorders • Intranets work across all computer systems and platforms another copy of that CD through the direct EDI con(Web-based). nection that its computer has with the manufacturing • Intranets can be built on top of an existing computer and shipping computer at the company that pubnetwork. lished the CD, say, Atlantic Records. No one at Wal• Intranets work with software programs that easily convert Mart or Atlantic Records fills out paperwork. No one electronic documents to HTML files for intranet use. makes phone calls. There are no delays to wait to find • Much of the software required to set up an intranet is out whether Atlantic has the CD in stock. The transeither freeware (no cost) or shareware (try before you buy, action takes place instantly and automatically beusually less expensive than commercial software). cause the data from both companies were translated into a standardized, shareable, compatible format. Exhibit 17.5 “Web services” are another way for companies to directly and automatically Why Companies Use Intranets transmit purchase and ordering information from one company’s computer systems to another company’s computer systems. Web services use standardized Web services protocols to describe and transfer data from one company in such a way that Using standardized protocols to those data can automatically be read, understood, transcribed, and processed describe data from one company in by different computer systems in another company.63 For instance, Route One such a way that those data can automatically be read, understood, is a company that was started by the financing companies of DaimlerChrysler, transcribed, and processed by different Ford, General Motors, and Toyota. Not surprisingly, each auto company has a computer systems in another company. different computer system with different operating systems, different programs, extranet and different data structures. Route One relies on Web services to connect these Networks that allow companies to different computer systems to the wide variety of different databases and softexchange information and conduct ware used by various auto dealers, credit bureaus, banks, and other auto financtransactions with outsiders by ing companies. Without Web services, there’s no way these different companies providing them with direct, Web-based access to authorized parts of a and systems could share information. In short, says Kelly Schmitz, IT director company’s intranet or information for biotech company Cubist Pharmaceuticals, “Web services can tie together system. applications that were never made to interact with each other.”64 Now, what’s the difference between Web services and EDI? For EDI to RFID technology is in use at this work, the data in different companies’ computer, database, and network sysCarrollton, Texas loading dock. tems must adhere to a particular set of standards for data structure and processBoxes equipped with RFID tags speed along a conveyor belt and ing. For example, company X, which has a 7-digit parts numbering system, and are recorded by the computer company Y, which has an 8-digit parts numbering system, would agree to conworkstation. The system vert their internal parts numbering systems to identical 10-digit parts numbers eliminates the need for workers to when their computer systems talk to each other. By contrast, the tools underlyscan every box with a handheld ing Web services, such as extensible markup landevice and so is more accurate. guage, or XML (don’t worry if you don’t how this works, just appreciate what it does), automatically do the describing and transcribing so that data with different structures can be shared across very different computer systems in different companies. As a result, Web services allow organizations to communicate data without special knowledge of each other’s computer information systems by automatically handling those differences. In EDI and Web services, the different purchasing and ordering applications in each company interact automatically without any human input. No one has to lift a finger to click a mouse, enter data, or hit the “return” key. An extranet, by contrast, allows companies to exchange information and conduct transactions by purposely providing outsiders with direct, Web browser–based access COURTESY OF AMERICAN AIRLINES, INC.
• Intranets are inexpensive.
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to authorized parts of a company’s intranet or information system. Typically, user names and passwords are required to access an extranet.65 For example, to make sure that its distribution trucks don’t waste money by running half empty (or make late deliveries to customers because it waited to ship until the trucks were full), General Mills uses an extranet to provide Web-based access to its trucking database to 20 other companies that ship their products over similar distribution routes. When other companies are ready to ship products, they log on to General Mills’ trucking database, check the availability, and then enter the shipping load, place, and pickup time. Thus, by sharing shipping capacity on its trucks, General Mills can run its trucks fully loaded all the time. In several test areas, General Mills saved 7 percent on shipping costs, or nearly $2 million in the first year. Expanding the program company-wide is producing even larger cost savings.66 Finally, similar to the way in which extranets are used to handle transactions with suppliers and distributors, companies are reducing paperwork and manual information processing by using the Internet to electronically automate transactions with customers. For example, most airlines have automated the ticketing process by eliminating paper tickets altogether. Simply buy an e-ticket via the Internet and then check yourself in at the airport using your credit card and an automated kiosk that prints out your boarding pass and your luggage tags. Together, Internet purchases, ticketless travel, and automated check-ins have fully automated the purchase of airline tickets. And, by eliminating the costs of recording, printing, handling, and mailing tickets, the commission that would have been paid to travel agents, and the hourly wages and benefits paid to check-in clerks, the airlines save an estimated $30 to $40 per ticket.67 In the long run, the goal is to link customer Internet sites with company intranets (or EDI) and extranets so that everyone—all the employees and managers within a company, and the suppliers and distributors outside the company—who is involved in providing a service or making a product for a customer is automatically notified when a purchase is made. Companies that use EDI, Web services, extranets, and the Internet to share data with customers and suppliers achieve increases in productivity 2.7 times larger than those that don’t.68
4.3 Sharing Knowledge and Expertise At the beginning of the chapter, we distinguished between raw data, which consist of facts and figures, and information, which consists of useful data that influence someone’s choices and behavior. One more important distinction needs to be made, namely, that data and information are not the same as knowledge. Knowledge is the understanding that one gains from information. Importantly, knowledge does not reside in information. Knowledge resides in people. That’s why companies hire consultants or why family doctors refer patients to specialists. Unfortunately, it can be quite expensive to employ consultants, specialists, and experts. So companies have begun using two information technologies, decision support systems and expert systems, to capture and share the knowledge of consultants, specialists, and experts with other managers and workers. Whereas an executive information system speeds up and simplifies the acquisition of information, a decision support system (DSS) helps managers understand problems and potential solutions by acquiring and analyzing information with sophisticated models and tools.69 Furthermore, whereas EIS programs are broad in scope and permit managers to retrieve all kinds of information about a company, DSS programs are usually narrow in scope and targeted toward helping managers solve specific kinds of problems. DSS programs have been developed to help managers pick the shortest and most efficient routes for delivery trucks, select the best combination of stocks for investors, and schedule the flow of inventory through complex manufacturing facilities.
knowledge The understanding that one gains from information.
decision support system (DSS) An information system that helps managers understand specific kinds of problems and potential solutions and analyze the impact of different decision options using “what if ” scenarios.
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expert system An information system that contains the specialized knowledge and decision rules used by experts and experienced decision makers so that nonexperts can draw on this knowledge base to make decisions.
It’s important to understand that DSS programs don’t replace managerial decision making; they improve it by furthering managers’ and workers’ understanding of the problems they face and the solutions that might work. For example, Apache Medical Systems (now owned by Cerner Corporation) makes a DSS for emergency room physicians.70 Apache’s DSS collects data on 17 different physiological signs, such as blood pressure, respiratory rate, temperature, and white blood count. Then, using a database containing the medical records of more than 400,000 people (with 100 diseases) who received treatment at more than 200 different emergency rooms, the DSS gives a diagnosis and rates the chances of the patient’s survival using various treatments. Apache’s DSS helps physicians pose and answer “what if” questions by processing the latest information about a patient’s health status three times a day and then printing out an unbiased, statistically based estimate of whether a given treatment is working. For example, if a nurse receives two printouts, one in the morning and another in the afternoon, indicating that a patient’s chances of survival have dropped from 75 percent to 55 percent, the nurse has a very good reason to contact the doctor to reconsider the treatment. Not only is apache helping doctors save lives, but it is also giving doctors the confidence to move patients out of intensive care earlier. With intensive care costs running about $5,000 a day, Apache helped the Dominican Hospital in Santa Cruz, California, save $2.8 million a year in unnecessary treatments.71 Expert systems are created by capturing the specialized knowledge and decision rules used by experts and experienced decision makers. They permit nonexpert employees to draw on this expert knowledge base to make decisions. Most expert systems work by using a collection of “if–then” rules to sort through information and recommend a course of action. For example, let’s say that you’re using your American Express card to help your spouse celebrate a promotion. After dinner and a movie, you and your spouse stroll by a travel office with a Las Vegas poster in its window. Thirty minutes later, caught up in the moment, you find yourselves at the airport ticket counter trying to purchase last-minute tickets to Vegas. But there’s just one problem. American Express didn’t approve your purchase. In fact, the ticket counter agent is now on the phone with an American Express customer service agent. So what put a temporary halt to your weekend escape to Vegas? An expert system that American Express calls “Authorizer’s Assistant.”72 The first “if–then” rule that prevented your purchase was the rule “if a purchase is much larger than the cardholder’s regular spending habits, then deny approval of the purchase.” This if–then rule, just one of 3,000, is built into American Express’s transaction-processing system that handles thousands of purchase requests per second. Now that the American Express customer service agent is on the line, he or she is prompted by the Authorizer’s Assistant to ask the ticket counter agent to examine your identification. You hand over your driver’s license and another credit card to prove you’re you. Then the ticket agent asks for your address, phone number, Social Security number, and your mother’s maiden name and relays the information to American Express. Finally, your ticket purchase is approved. Why? Because you met the last series of “if–then” rules. If the purchaser can provide proof of identity and if the purchaser can provide personal information that isn’t common knowledge, then approve the purchase.
Review 4: Accessing and Sharing Information and Knowledge Executive information systems, intranets, and corporate portals facilitate internal sharing and access to company information and transactions. Electronic data interchange, Web services, and the Internet allow external groups, like suppliers and customers, to easily access company information. All three decrease costs by reducing or eliminating data entry, data errors, and paperwork, and by speeding up communication. Organizations use decision support systems and expert systems to capture and share specialized knowledge with nonexpert employees.
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Key Terms acquisition cost, 559 association/affinity patterns, 563 authentication, 566 authorization, 566 bar code, 562 biometrics, 567 communication cost, 560 corporate portals, 570 data clusters, 564 data encryption, 567 data mining, 563 data warehouse, 563 decision support system (DSS), 573 electronic data interchange (EDI), 571
electronic scanner, 562 executive information system (EIS), 570
expert system, 574 extranet, 572 firewall, 567 first-mover advantage, 555 information, 555 intranets, 570 knowledge, 573 Moore’s law, 554 optical character recognition, 562 predictive patterns, 564 processing cost, 559 processing information, 562
protecting information, 564 radio frequency identification (RFID) tags, 562 raw data, 555 retrieval cost, 560 secure sockets layer (SSL) encryption, 568 sequence patterns, 563 storage cost, 559 supervised data mining, 563 two-factor authentication, 566 unsupervised data mining, 563 virtual private network (VPN), 568 virus, 567 Web services, 572
Concept Check 1. What is the difference between data and information? Why is the distinction important? 2. Discuss the strategic importance of information. 3. Identify and describe the characteristics and costs of useful information. 4. How do companies capture information? 5. Describe ways that managers can process the information they collect. 6. What kinds of security threats to information do managers contend with routinely?
7. How do managers protect their information? 8. How can companies use information technology to improve access to and sharing of information within the organization itself? 9. How can companies use information technology to improve access to and sharing of information with external organizations (e.g., customers, suppliers, etc.)? 10. What is knowledge, and how can it be shared throughout an organization?
Self-Assessment COMPUTER COMFORT Computers are ubiquitous in modern society, but that does not mean that everyone embraces them. As with any innovation, some people are reluctant to adopt computer technology for whatever reason. How comfortable are you with computer technology? The
Self-Assessment Appendix has a survey designed to reveal how anxious or confident you are with computers. Wherever you fall on the spectrum, you can use the results as a baseline for developing (or enhancing) your computer skills. Turn to page 624 and get started!
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Management Decision CAN YOU SEE IT NOW? After a long weekend working with your information technology team, you are confident that the company’s server is thoroughly protected from outside attacks.73 You and your team spent months planning and four days working around the clock to update the IT system, install, firewalls, and load SSL into the company’s ecommerce tools, just to name a few of the security measures you upgraded. Now your company’s information is protected with the latest and greatest. When you stumble back to work on Wednesday, you follow your familiar route through the marketing department. Turning a corner, you overhear a junior marketing employee talking on her cell phone. She’s saying, “I’m sooooooo far behind. No, really, I am. Check it out.” Then she lifts her cell phone in the air and begins taking pictures of her desk. Suddenly, you’ve lost your mission-accomplished swagger. Your team just spent thousands of labor hours protecting the company’s digital assets, but anybody with a camera phone can take pictures of printouts, office layouts, client lists, accounting reports, marketing strategies, trade secrets—anything. A cell phone is the telecommunication version of a Swiss army knife: a versatile tool with potentially dangerous capabilities. Most cell phones have large memories for storing images, and what’s more, they have GPRS technology to connect them wirelessly to the Internet. Someone could take a picture of sensitive information,
and in seconds, it could travel around the world and land on a competitor’s computer (or cell phone, for that matter). Camera-equipped cell phones are quickly becoming the norm. The market for the hybrid phones grew 200 percent in 2004, and researchers estimate that by 2008, 68 percent of all cell phones will be equipped with cameras and video capabilities—and the memory necessary to drive them. Your pace quickens. You stop at your office to ditch your briefcase and then head straight to the CEO. Halfway there, however, you realize you need to be more composed before sounding alarm bells. Returning to your office, you fire up your computer and begin working on a memo. Questions 1. What areas of a company are most likely to be compromised by the presence of camera phones? 2. Besides cell phones, can you think of other personal items that represent threats to a company’s information, digital or otherwise? What are they? Should companies be able to restrict such items in the work place? 3. How could camera phones improve the collection and dissemination of information in a company? 4. Do you recommend banning camera phones in the workplace? Why or why not? Write a brief memo to the CEO explaining your position.
Management Team Decision YOU SAVED $9.32! The numbers are staggering: more than 12,000 U.S. supermarkets offer some kind of shopper card or customer reward program, already covering over 50 percent of the grocery market, and the trend is on the upswing.74 Since their inception, shopper card programs have largely been confined to offering cents-off discounts to customers who join. The birth of the shopper card was a move by supermarkets to slow the intrusion of the likes of Wal-Mart and Target into the nearly $400 billion grocery industry. Supermarkets often operate on razor-thin margins (think low single digits) and are no match for the purchasing power of big discount chains.
To keep customers from defecting to Wal-Mart Supercenters, Super Targets, and Meijer, traditional supermarkets use shopper card loyalty programs to collect data on customers and their purchases. When a customer signs up, he or she gives basic demographic data: name, address, phone number, maybe even income and a credit card number. Once the customer starts reaping the benefits of the card, (i.e., discounts), the supermarket begins collecting data about how he or she spends money in the store, what brands are bought, how often, in what size, and so forth. By tracking customer spending habits, supermarkets have the data they need to send coupons for products a customer buys just about the time the customer is ready to buy them. Stores also
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know how to target their coupons. In other words, they do not send coupons for cat food to a customer who has only bought dog food in the past. Sending coupons in the mail and giving in-store discounts to shoppercard-carrying customers are the basic ways of creating customer loyalty programs. Simple shopper card programs are expanding into areas beyond the grocery. For example, some stores work with major airlines to offer frequent-flier miles for every dollar spent at the grocery. Other stores have clubs designed around various interests: Winn Dixie has a Baby Club for new parents, a Wine Club for wine enthusiasts, and a Pet Club for animal owners. Each club produces a newsletter on the topic of interest, sends coupons and notices for in-store promotions, and some even give $10-off coupons after you have spent $200 in the store on items associated with the club (like diapers and formula for the Baby Club). One successful program, Greenpoints, allows shoppers to collect points with every purchase and redeem them for merchandise or cash back. Greenpoints even lets you transfer your points to your local school so that it can buy supplies, from paper and pens to computers. Although shopper cards enable stores to collect hoards of data, they are not without drawbacks. Many independent organizations and journalists have shown that the regular price of an item is offered to cardholders as the discounted price. If you don’t have a card, you can pay 30 percent over the regular retail price of the item. Backlash against the collection of consumer information is also building, as stores become more creative and assertive about amassing customer data. (Safeway has launched computerized carts that use wireless technology to track where you are in the store and offer you discounts depending on what product you’re looking at.) And people who buy more, save more, which means that lower-income shoppers will not spend enough to show up on the radar for frequentuser discounts. But perhaps the biggest drawback is the cost. Expensive computer technology is needed to automate discounting and to warehouse and sort data; special bulk mailings to residential addresses cost more than newspaper inserts; maintaining and managing extensive programs takes time and personnel. Plus, stores have typically not been able to convert their masses of data into useful information. One researcher estimates that fewer than 30 percent of stores know how to effectively use the data they collect and that less than
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10 percent are able to use the data strategically to set prices. Most of the grocery industry has not committed to using the loyalty card data, so programs have become nothing more than electronic coupons. Nonetheless, shopper card programs are still on an upward trend. At the very least, they help grocers analyze purchasing trends at individual stores, and with profit margins typically under 5 percent, that can mean a lot. In a world of supercenters, grocers need a tool to make intelligent decisions so that they can survive. And to make those decisions, supermarkets need good information. Still, not all stores have a shopper card program. For this management team decision, your team will be acting as the management team of a small chain of independent supermarkets that does not yet have a shopper card program. You will decide whether to follow the rising tide and implement a shopper card program. Your team will need to consider the types of data to collect, the cost of collection (you don’t need hard figures here), and the cost of converting the data to information, among other things. Questions 1. As a team, brainstorm several ways that you can capture data about your customers. How will you turn the data you collect into useful, valuable information? (Hint: Remember that information is only useful when it is accurate, complete, relevant, and timely.) 2. Identify monetary and nonmonetary costs of collecting the information. Are there costs (or risks) to not collecting customer data? 3. Since you will not be the first supermarket to implement a shopper card or loyalty program, how can you create a competitive advantage by adding one? In other words, how can you use a shopper card program to continuously improve and support the core functions of the supermarket? (Think along the lines of increasing store traffic, managing inventory, and so forth.) 4. Based on the exploratory work you have done, do you adopt a loyalty card program at your small chain of supermarkets? Explain your decision. 5. Optional: Using the information from Chapter 5 on planning, write a plan for implementing a shopper card/loyalty program at your supermarket network.
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Develop Your Career Potential LEARN TO TALK TECH Most people are intimidated by technology. But like many things, technology becomes easier if you familiarize yourself with the basics. One way to learn to “speek like a geek” is to subscribe to PC Magazine, the premier magazine about personal computing. Depending on your budget, it may be more feasible (and possibly more productive) if you spend a set amount of time each week perusing the periodical section of the library and flipping through a selection of magazines dedicated to technology. The important thing is to be patient, however. After several months, you should begin to understand what they’re talking about. After that, it’s easy to stay current. Sign up at http://pcmag.com. You can also sign up for the “Term of the Day” email newsletter at http://webopedia.com. Each day, Webopedia emails you a new technology term and its definition. Either way, you’ll soon be able to talk tech. Why is talking tech so important? Information technology (IT) is an integral part of nearly every business, whether it’s simple email applications or more complex networking, e-commerce, and operations software. Very few companies are able to get by without using IT regularly. This being the case, managers need to understand this critical component of their companies’ operations. That’s not to say that managers (other than IT managers, of course) need to know every last technical detail, but as a manager, you will need—and want—to know what your tech staff is talking about when they bring problems, concerns, or suggestions for improvement to your office. Computers are becoming an integral part of all kinds of work, so you need to do more than just
understand the terminology, however. You also need to be able to use technology effectively. The reason is that people with basic computer skills earn 15 to 30 percent higher lifetime incomes than those without them. What should you do to learn about computers? Subscribe to PC Magazine, PC World, or Mac World. Buy a book about Microsoft Office and then take tests to be Microsoft Office User certified (see the Microsoft Web site for more information) in Word, Excel, PowerPoint, or Access. Take more than the required computer classes for your degree. Unless you want less job security and earning power, start learning more about computers today. Activities 1. If you are completely new to IT, you might be more comfortable reading about it in the context of your favorite business publication. Walter Mossberg has a regular technology column in the Wall Street Journal, and Peter Lewis has a column titled “Gadgets,” which can always be found in the so-called First section of Fortune magazine. Articles in both publications are on the shorter side, so take an hour and read through a few weeks’ worth of each. 2. The U.S. government operates a technology Web site at http://www.technology.gov. Go there to download a report published in June 2003 on technology training opportunities (there may even be a more recent one). The table of contents alone will give you a wealth of ideas about where and what kind of IT training you may want to pursue in conjunction with your business degree.
Take Two
Biz Flix Lorenzo’s Oil
This film tells the true story of young Lorenzo Odone who suffers from adrenoleukodystrophy (ALD), an incurable degenerative brain disorder. (Six actors and actresses play Lorenzo throughout the film.) Physicians and medical scientists offer little help to Lorenzo’s desperate parents, Michaela (Susan Sarandon) and Augusto (Nick Nolte). They use their resources to learn about ALD to try to save their son. Director George Miller cowrote the script, which benefited from his medical training as a physician. Six months after Lorenzo’s ALD diagnosis, his condition fails to improve with a restricted diet. Michaela and Augusto continue their research at the National Institutes of Health library in Bethesda, Maryland. Michaela finds a report of a critical Polish experiment that showed positive effects of fatty acid manipulation in rats. Convinced that a panel of experts could systematically focus on their problem, they help organize the First International ALD Symposium. This scene is an edited version of the symposium sequence that appears about midway through the film. The film continues with the Odones’ efforts to save their son. What to Watch for and Ask Yourself
1. Do the scientists present data or information during the symposium? 2. If it is information, who transformed the data into information? Speculate about how such data become information. 3. What do you predict will be the next course of action for the Odones?
Management Workplace Data Management
Have you ever thought of data as money? Probably not in your personal life, but in business, information has a cost and therefore a related value. Businesses across the world that rely heavily on computer technology understand the value of their data and implement ways to protect their data and data networks from theft, damage, or incompetence. Still, it is easy to be lulled into overconfidence (or sheer laziness) when it comes to computer upgrades or simple virus protection. Nevertheless, data management should be a priority for all companies. In this video, managers from some of the largest names in data protection (Symantec, TrendMicro, McAfee) talk about the threats to data and data networks and the ways you can safeguard your computer against attacks What to Watch for and Ask Yourself
1. According to the video, are upgrades really necessary? 2. Describe the nature of data protection. 3. Explain the paradox of ubiquitous computing described in the video. That is, how has the pervasiveness of computer technology made our lives easier and more difficult at the same time?
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Managing Service and Manufacturing Operations
C H A P T E R
O U T L I N E
Chapter18 What Would You Do? Managing for Productivity and Quality 1. Productivity 1.1 Why Productivity Matters 1.2 Kinds of Productivity
2. Quality 2.1 Quality-Related Characteristics for Products and Services 2.2 ISO 9000 and 14000 2.3 Baldrige National Quality Award 2.4 Total Quality Management
Managing Operations 3. Service Operations 3.1 The Service-Profit Chain 3.2 Service Recovery and Empowerment
4. Manufacturing Operations 4.1 Amount of Processing in Manufacturing Operations 4.2 Flexibility of Manufacturing Operations
5. Inventory 5.1 Types of Inventory 5.2 Measuring Inventory 5.3 Costs of Maintaining an Inventory 5.4 Managing Inventory
Key Terms Concept Check Self-Assessment Management Decision Management Team Decision Develop Your Career Potential Take Two Video
STUDENT RESOURCES ThomsonNOW On the Job and Biz Flix video applications, concept tutorial, and concept exercise Xtra! Eight exhibit worksheets, author FAQs, quiz, Management News, and the video clips from the chapter with exercises
Web (http://williams.swlearning.com) Quiz, PowerPoint slides, and glossary terms for this chapter
Hyundai Headquarters, Seoul, South Korea.1 Ever since Tonight Show host Jay Leno said that a Hyundai car is like a luge sled—it “has no room, you have to push it to get going, and it only goes downhill”—the jokes haven’t stopped. Another popular joke goes, “How do you double the value of a Hyundai? Fill it with gas!” They’re even repeating these jokes in South Korea! Unfortunately, Hyundai’s situation is not funny. As one of your top managers said, “Car buyers have long memories and it takes a while to change their perceptions, especially when they’re bad.” And, with buyers complaining about problematic electrical systems, rusting bumpers, poor-fitting doors, and broken air conditioners, those perceptions were clearly reflected in the well-known and influential J. D. Power Survey of Initial Car Quality. Hyundai cars ranked 26th out of 35 in initial car quality, and Kia, a bankrupt South Korean car company that Hyundai had paid $8 billion to acquire, finished dead last. Not surprisingly, because of the terrible quality Hyundai’s U.S. sales dropped to 90,000 cars this year from 264,000 cars two years ago. As a result, even car dealers, who put up thousands of dollars to have the chance to sell Hyundais, are abandoning their Hyundai franchises as fast as they can. When customers leave in droves, you know something is wrong. When the dealers start jumping like rats fleeing a sinking ship, you know that conditions are critical. And with corporate managers telling them that “With such low prices, we don’t need higher quality,” why should the dealers stay? Hoping to expand its U.S. presence, Hyundai is spending $1 billion to build a new auto plant in Montgomery, Alabama. But Americans won’t buy Hyundais just because they’re built in America. Daewoo Motors, another South Korean auto company, followed a similar strategy in the 1990s, spending billions to build plants around the world. But because Daewoo never fixed its quality problems, it lost billions and filed for bankruptcy. Amazingly, Hyundai made the same mistake in Canada, spending $1 billion to build a manufacturing plant there, only to close it three years later. Repeating that mistake in Alabama just might put the company under. Hyundai
What Would You Do?
experienced its first loss this year, and the company is short on cash and high on debt, which at $6.6 billion is six times Hyundai’s stock market capitalization of $1 billion. Plus, labor-management relations are still tenuous after a 47-day worker strike in Hyundai’s South Korean factories. During the strike, which cost the company $1 billion in disrupted production, workers living in tents on the factory grounds threw Molotov cocktails to express their frustration. The company finally settled the strike by granting workers a huge 8.6 percent pay increase that will put even more strain on its finances. And those finances are likely to come under more pressure now that the South Korean government is allowing Japanese car imports for the first time. If Hyundai is to survive, if car buyers’ perceptions are to change, and if the $1 billion investment in the new plant in Alabama is to pay off, then quality must improve. But how do you go about making better cars? Your first goal is to change the mindset in the comSTUDY TIP pany by convincing managers Studying for comprehensive and factory workers that qualexams doesn’t have to be a ity comes first. What’s the best way to do that? Next, you have chore. Form a study group. to identify the steps you need Photocopy the glossary at the to take to improve quality. end of this text, and cut the Doing that won’t be easy or copies into strips, one term quick, but it can be done. per strip. Put all strips into a Where do you start? Finally, you have to convince large bowl. Divide into two customers you care, that you’re teams and have one team at a listening to their complaints, time draw out a strip. Quiz the and you will be responsive. If opposing team and then read you can’t do that, those all imthe correct answer. You can do portant quality rankings won’t improve. If you were in charge the same with the chapter at Hyundai, what would you outlines at the beginning of do? each chapter. You can tabulate points, but you’ll all win!
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operations management Managing the daily production of goods and services.
The problems that Hyundai, Inc. faces in manufacturing its cars are not unique to the automobile industry. Airlines, furniture manufacturers, hospitals, restaurants, and many other kinds of businesses also struggle to find ways to efficiently produce quality products and services and then deliver them in a timely manner. In this chapter, you will learn about operations management—managing the daily production of goods and services. You will begin by learning about the basics of operations management: productivity and quality. Next, you will read about managing operations, beginning with service operations, turning next to manufacturing operations, and finishing with an examination of the types, measures, costs, and methods for managing inventory.
Managing for Productivity and Quality You’re “crossing the pond” in September to visit your company’s European offices and suppliers. Because business is down, your boss has given you a limited budget of $1,600 for airfare. Your round-trip ticket from Chicago to London costs $990 on American Airlines, but that leaves only $610 for airfare in Europe. The total cost of flying from London to Dublin, Ireland (via British Airways), Dublin to Brussels, Belgium (via Aer Lingus), Brussels to Venice, Italy (via Lufthansa), and Venice to London (via Alitalia) is $1,191—$581 more than your remaining budget and $201 more than your flight from the United States. At lunch, you’re griping about the cost of European air travel when the company intern tells you to check out Ryanair, which she flew when she backpacked in Europe last summer. So, after lunch, you surf to http://www.ryanair.com and find that the total cost to travel to the same cities on the same dates and times is an amazing $84, or just 7.5 percent of the cost of flying the other major European airlines! Modeled after U.S.-based Southwest Airlines, Ryanair achieves dramatically lower prices through aggressive price cutting, much higher productivity, and quality customer service. Want a frequent-flier plan? You won’t find one at Ryanair. It’s too expensive. Want a meal on your flight? Pack a lunch. Ryanair doesn’t even serve peanuts because it takes too much time (i.e., expense) to get them out of the seat cushions. Passengers enter and exit the planes using oldfashioned, rolling stairs because they’re quicker and cheaper than extendable boarding gates. As a result of such cost-cutting moves, Ryanair does more with less and thus has higher productivity. For example, most airlines break even on their flights when they’re 75 percent full, but even with its incredibly low prices, Ryanair’s productivity allows it to break even when its planes are only half full. And with this low breakeven point, Ryanair attracts plenty of customers who enable it to fill most of its seats (84 percent) and earn 20 percent net profit margins. Finally, because of its extremely low prices (and its competitors’ extremely high prices), Ryanair has increased passenger traffic and profits for 17 straight years.2 1 2
1 productivity A measure of performance that indicates how many inputs it takes to produce or create an output.
After reading the next two sections, you should be able to discuss the kinds of productivity and their importance in managing operations. explain the role that quality plays in managing operations.
PRODUCTIVITY
At their core, organizations are production systems. Companies combine inputs, such as labor, raw materials, capital, and knowledge, to produce outputs in the form of finished products or services. Productivity is a measure of performance that indicates how many inputs it takes to produce or create an output.
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Productivity 5
Outputs Inputs
The fewer inputs it takes to create an output (or the greater the output from one input), the higher the productivity. For example, a car’s gas mileage is a common measure of productivity. A car that gets 35 miles (output) per gallon (input) is more productive and fuel efficient than a car that gets 18 miles per gallon. Let’s examine 1.1 why productivity matters and 1.2 the different kinds of productivity.
1.1 Why Productivity Matters Why does productivity matter? For companies, higher productivity, that is, doing more with less, results in lower costs. In turn, doing more with less can lead to lower prices, faster service, higher market share, and higher profits. For example, at fast-food restaurants, every second saved in the drive-through lane increases sales by 1 percent. Furthermore, increasing the efficiency of drivethrough service by 10 percent adds nearly 10 percent to a fast-food restaurant’s sales. And with 65 percent of all fast-food restaurant sales coming from the drive-through window, it’s no wonder that Wendy’s (average drive-through time of 124.7 seconds), McDonald’s (average time of 152.5 seconds), and Burger King (average time of 173.2 seconds) continue to look for ways to shorten the time it takes to process a drive-through order.3 For countries, productivity matters because it results in a higher standard of living. One way productivity leads to a higher standard of living is through increased wages. When companies can do more with less, they can raise employee wages without increasing prices or sacrificing normal profits. For instance, when I wrote this chapter, recent government economic data indicated that companies were paying workers 3.5 percent more than in the previous year. But, since workers were producing 5.1 percent more than they had the year before, real labor costs had actually decreased by 1.6 percent.4 How much difference can productivity increases make to wages and standards of living? If productivity grows just 1 percent a year, it will take 70 years to double the standard of living. But, if productivity grows 2 percent per year, the standard of living will double in just 35 years. One way to demonstrate this is to examine the effect that productivity has on wages. For example, the average American family earned approximately $54,821 in 2003. If productivity grows 1 percent a year, that family’s income will increase to $69,608 in 2028. But if productivity grows 2 percent a year, their annual income in 2028 will be $88,176, more than $18,000 higher, and that’s without working longer hours.5 Thanks to long-term increases in business productivity, the average American family today earns 33 percent more than the average family in 1980 and 223 percent more than the average family in 1953—and that’s after accounting for inflation.6 Rising income stemming from increased productivity creates numerous other benefits as well. For example, with productivity increases exceeding 3.8 percent per year from 1999 to 2004, the U.S. economy created 3 million new jobs.7 And when more people have jobs that pay more, they give more to charity. For example, in 2004 Americans donated over $248 billion to charities, 31 percent more than they gave in 1999.8 Did Americans become more thoughtful, caring, conscientious, and giving between 1999 and 2004? Probably not. Yet, because of strong increases in productivity during that time, the average American family saw its income increase by 15 percent. Because more people earned more money, they were able to share their good fortune with others by giving more to charity.9 Another benefit of productivity is that it makes products more affordable or better. For example, while inflation has pushed the average cost of a car to about $28,120 (after incentives and discounts), increases in productivity have actually made cars cheaper. In 1960, the average family needed 26 weeks of income to
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pay for the average car. Today, the average family needs only 20.6 weeks of income—and today’s car is loaded with accessories that weren’t even available in 1960, including air bags, power steering and brakes, power windows, cruise control, stereo/CD/DVD players, seat warmers, air-conditioning, and satellite navigation.10 So, in terms of real purchasing power, productivity gains have actually made today’s $28,120 car of today cheaper than that $2,000 car in 1960.
1.2 Kinds of Productivity partial productivity A measure of performance that indicates how much of a particular kind of input it takes to produce an output.
multifactor productivity An overall measure of performance that indicates how much labor, capital, materials, and energy it takes to produce an output.
Two common measures of productivity are partial productivity and multifactor productivity. Partial productivity indicates how much of a particular kind of input it takes to produce an output. Partial Productivity 5
Outputs Single Kind of Input
Labor is one kind of input that is frequently used when determining partial productivity. Labor productivity typically indicates the cost or number of hours of labor it takes to produce an output. In other words, the lower the cost of the labor to produce a unit of output, or the less time it takes to produce a unit of output, the higher the labor productivity. For example, the automobile industry often measures labor productivity by determining the average number of hours of labor needed to completely assemble a car. The three most productive auto manufacturers can assemble a car with 32 or fewer hours of labor. Toyota assembles a car in only 27.9 hours of labor, Nissan does it in 29.4 hours, and Honda in 32 hours. These manufacturers have higher labor productivity than General Motors, which needs 34.3 hours of labor to assemble a car, DaimlerChrysler, which needs 35.8 hours, and Ford, which needs 36.9 hours.11 These lower labor costs give Nissan, Honda, and Toyota an average cost advantage of $350 to $500 per car.12 Partial productivity assesses how efficiently companies use only one input, such as labor, when creating outputs. Multifactor productivity is an overall measure of productivity that assesses how efficiently companies use all the inputs it takes to make outputs. More specifically, multifactor productivity indicates how much labor, capital, materials, and energy it takes to produce an output.13 Multifactor Productivity 5
Outputs (Labor 1 Capital 1 Materials 1 Energy)
Exhibit 18.1 shows the trends in multifactor productivity across a number of U.S. industries since 1987. With a 78 percent increase between 1997 (scaled at 100) and 2001 (when it reached a level of 178) and nearly a sixfold increase since 1987, the growth in multifactor productivity in the computers and electronic products industry far exceeded the productivity growth in retail stores, auto manufacturing, mining, utilities, finance and insurance, and air transporation as well as most other industries tracked by the U.S. government. Of course, the surge in productivity in the computer and electronics industry isn’t a surprise. Each round of technology advances brings significantly smaller and cheaper, yet much more powerful electronic devices. Significantly less labor, capital, materials, and energy are needed to produce computers and electronic products (e.g., computer game devices such as the PlayStation 2, cell phones, MP3 players) today than in the past. An examination of some of the components of multifactor productivity shows how firms in the computer and electronics industry, such as Dell, Inc., have achieved such large increases in productivity. First, with respect to labor, every time Dell opens a new factory, it increases productivity by producing more computers with fewer factory workers. John Egan, who directs manufacturing and distribution for one of Dell’s most popular computer lines, says, “Every time [we open a new plant,] we get more and more efficient.”14 In fact, Dell’s plant on Parmer Lane in Austin, Texas, is twice
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180
Computers & Electronic Products
Multifactor Productivity (1987 = 100)
160 140
Retail Stores Auto Manufacturing Mining Utilities Finance & Insurance
120 100 80
Air Transportation
60 40 20 0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year
Source: “Productivity and Costs,” Bureau of Labor Statistics, [Online] available at http://data.bls.gov/cgi-bin/surveymost?ip, 1 July 2005.
Exhibit 18.1
as productive as the plant it replaced. Likewise, Dell saves on labor costs because 95 percent of the orders processed by this plant are handled automatically when customers place their orders on the Internet. Second, with respect to capital, multifactor productivity assesses how efficiently a company uses the money it spends on equipment, facilities (offices and operating plants), inventories, and land. Dell has greatly increased the productivity of its assembly plants by aggressively cutting costs and by building plants twice as fast as its competitors. For instance, Dell built its new assembly plant in Lebanon, Tennessee, in only 62 days. Dell cut two weeks out of the construction process by picking the architectural firm one morning and then working with the architects from noon till midnight on that same day to put together a construction schedule and budget.15 Finally, in terms of materials, that is, the components used to manufacture computers, Dell’s new factories have almost no parts or finished product inventory. Computer parts are ordered when customers place their orders. And, according to Sharon Boyle, who manages Dell’s new Parmer Lane plant, “More than 95 percent of the orders received are shipped within eight hours.” In fact, when the plant was designed, the company completely eliminated space that would normally hold parts and finished goods.16 Should managers use multiple or partial productivity measures? In general, they should use both. Multifactor productivity indicates a company’s overall level of productivity relative to its competitors. In the end, that’s what counts most. However, multifactor productivity measures don’t indicate the specific contributions that labor, capital, materials, or energy make to overall productivity. To analyze the contributions of these individual components, managers need to use partial productivity measures.
Review 1: Productivity At their core, companies are production systems that combine inputs, such as labor, raw materials, capital, and knowledge, to produce outputs, such as finished products or services. Productivity is a measure of how many inputs it takes to produce or create an output. The greater the output from one input, or the fewer inputs it takes to create an output, the higher the productivity. Partial productivity measures how much of a single kind of input, such as labor, is
Multifactor Productivity Growth across Industries
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needed to produce an output. Multifactor productivity is an overall measure of productivity that indicates how much labor, capital, materials, and energy are needed to produce an output. Increased productivity helps companies lower costs, which can lead to lower prices, higher market share, and higher profits. Increased productivity helps countries by leading to higher wages, lower product prices, and a higher standard of living. 2
quality A product or service free of deficiencies, or the characteristics of a product or service that satisfy customer needs.
Exhibit 18.2 J.D. Power Survey of Initial Car Quality
QUALITY
With the average car costing more than $28,000, car buyers want to make sure that they’re getting good quality for their money. Fortunately, as indicated by the number of problems per 100 cars (PP100), today’s cars are of much higher quality than earlier models. In 1981, Japanese cars averaged 240 PP100. General Motors’ cars averaged 670, Ford’s averaged 740, and Chrysler’s averaged 870 PP100! In other words, as measured by PP100, the quality of American cars was three to four times worse than Japanese cars. By 1992, however, U.S. carmakers had made great strides, significantly reducing the number of problems to an average of 155 PP100. Japanese vehicles had improved, too, averaging just 125 PP100. Exhibit 18.2 shows the results of the 2005 J.D. Power survey of initial car quality. Lexus, with just 81 PP100, had the best quality, followed by Jaguar at 88 PP100 and BMW at 95 PP100, while Suzuki, with 151 PP100, had the worst, followed by Land Rover and Mazda at 149 PP100. The overall average was 118 PP100. American automakers, especially Buick (GM) with 100 PP100, Cadillac (GM) with 104 PP100, and Hummer (GM) with 110 PP100, continued to close the quality gap with Japanese and luxury auto companies. Lincoln, with 113 PP100, and Jeep and Mercury, both with 120 PP100, and Chrysler, with 121 PP100, were close to Honda, with 112 PP100, and equal to Nissan, with 120 PP100. Toyota, however, still had only 105 PP100. The American Society for Quality gives two meanings for quality. It can mean a product or service free of deficiencies, such as the number of problems per 100 cars, or it can mean the characteristics of a product or service that satisfy customer needs.17 In this sense, today’s cars with their additional
Suzuki Land Rover Mazda Volkswagen Porsche Kia Volvo Subaru Saab Saturn Scion MINI Dodge Mitsubishi Pontiac Ford Chevrolet Chysler Jeep Nissan Mercury Acura GMC Lincoln Honda Hummer Hyundai Infiniti Audi Toyota Mercedes-Benz Cadillac Buick BMW Jaguar Lexus
151 149 149 147 147 140 140 138 136 136 134 130 130 129 129 127 127 121 120 120 120 116 113 Industry Average = 113 118 PP100 112 110 110 109 106 105 104 104 100 95 88 81
0
20
40
60
80
100
120
140
160
Problems per 100 Cars Source: “J.D. Power and Associates 2005 Initial Quality Study (IQS),” J.D. Power and Associates, [Online] available at http://www. jdpower.com/pdf/2005069.pdf, 1 July 2005.
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standard features (power brakes and steering, stereo/CD player, power windows and locks, air bags, cruise control, etc.) are of higher quality than those produced 20 years ago. In this part of the chapter, you will learn about 2.1 quality-related characteristics for products and services, 2.2 ISO 9000 and 14000, 2.3 the Baldrige National Quality Award, and 2.4 total quality management.
2.1 Quality-Related Characteristics for Products and Services
AFP/ GETTY IMAGES
Reliab ilit y
Se
ability ice rv
As shown in Exhibit 18.3, quality products usually possess three characteristics: reliability, serviceability, and durability.18 A breakdown occurs when a product quits working or doesn’t do what it was designed to do. The longer it takes for a product to break down, or the longer the time between breakdowns, the more reliable the product. Consequently, many companies define product reliability in terms of the average time between breakdowns. For example, Quantum Corporation sells a computer product called the SDLT 600 tape drive that customers can use to back up 600 gigabytes of data. The SDLT 600 is so reliable that the estimated mean time between breakdowns is 250,000 hours, or more than 28.5 years!19 Of course, this is just an average. Some SDLT 600 tape drives will break down much sooner, but others will last even longer than 28.5 years. Serviceability refers to how easy or difficult it is to fix a product. The easier it is to maintain a working product or fix a broken product, the more serviceable that product is. The Reva is an electric two-seater car, built in India, for city use. It goes 50 miles on a single battery charge, which takes just five hours, and costs two-thirds less per mile than a typical gasoline-powered car. The Reva has high serviceability by virtue of a computerized diagnostic system that plugs into a portable electronic tool (PET) about the size of a personal digital assistant that assesses how well the car is running. Since the PET can be linked to a phone, customers can easily transmit their Reva’s operational history to instantly find out if their car needs work and, if so, what kind. In many instances, a simple computer change downloaded to the PET and then to the Reva will fix the problem.20 A product breakdown assumes that a product can be repaired. However, some products don’t break down—they fail. Product failure means products can’t be repaired. They can only be replaced. Thus, durability is a quality characteristic that applies to products that can’t be repaired. Durability is defined as the mean time to failure. Durability is crucial for products such as the defibrillation equipment used by emergency medical technicians, doctors, and nurses to restart patients’ hearts. Imagine the lost lives (and lawsuits) that would occur if this equipment were prone to frequent failure. The mean time between failures for Physio-Control’s defibrillation units is 55.6 to 69.4 years.21 If a Physio-Control “LIFEPAK” does break, however, the company replaces it within 24 hours. While high-quality products are characterized by reliability, serviceability, and durability, services are different. With services, there’s no point in assessing durability. Unlike products, services don’t last. Services are consumed the minute they’re performed. For example, once a lawn service has mowed your lawn, the job is done until the mowers come back next week to do it again. Likewise, services don’t have serviceability. You can’t maintain or fix a service. If a service wasn’t performed correctly, all you can do is perform it again. Finally, the quality of service interactions often
Product
Dur
a b ilit y
Exhibit 18.3 Characteristics of Product Quality
An electric Reva automobile drives along a city street during Bangalore’s celebration of World Environment Day. Reva uses a computer diagnostic system that can sync to the owner’s cell phone, indicating the type of service the vehicle needs.
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nce Assura athy Emp
Responsiveness
s Tangible
Relia
bility
S e r v i c e Q u a lit y
Exhibit 18.4 Characteristics of Service Quality
depends on how the service provider interacts with the customer. Was the service provider friendly, rude, or helpful? Consequently, as shown in Exhibit 18.4, five characteristics—reliability, tangibles, responsiveness, assurance, and empathy—typically distinguish a quality service.22 Service reliability is the ability to consistently perform a service well. Studies clearly show that reliability matters more to customers than anything else when buying services. Also, although services themselves are not tangible (you can’t see or touch them), services are provided in tangible places. Thus, tangibles refer to the appearance of the offices, equipment, and personnel involved with the delivery of a service. Responsiveness is the promptness and willingness with which service providers give good service. Assurance is the confidence that service providers are knowledgeable, courteous, and trustworthy. Empathy is the extent to which service providers give individual attention and care to customers’ concerns and problems. EMC Corporation makes highly reliable computers that are used by some of the largest companies in the world (e.g., banks, phone companies, auto manufacturers). If EMC’s equipment goes down for even a few minutes, its customers can lose millions from vanished sales. While its equipment is incredibly reliable, what distinguishes EMC from its competition is the level of service it provides when problems occur. In other words, EMC is a standout performer in service reliability, the ability to consistently perform a service well. Because of its excellent service, EMC retains an amazing 99 percent of its customers from year to year. When Carl Howe of Forrester Research, a marketing research firm, asked 50 Fortune 500 companies about the technology companies they worked with, “EMC came out looking like God.” Howe said that EMC “had the best customer-service reviews we have ever seen, in any industry.”23 EMC also excels in responsiveness, the promptness and willingness with which service providers give good service. When a Wisconsin bank lost access to all its data (no account numbers, no deposits, no withdrawals, nada!), which were stored on an EMC machine, EMC service engineers were on the problem within minutes (EMC’s computers “call home” automatically whenever a problem arises). In four hours EMC had created a setup identical to the bank’s in a $1 billion facility designed for such purposes, where EMC engineers identified the problem and put together a software patch that had the bank up and running by the end of the day.24 EMC provides quality service by virtue of clear assurance that it can be trusted. Every customer knows that the company follows a disciplined procedure for addressing customer problems. First, every EMC system does a selfcheck every two hours to make sure the system is running the way it’s supposed to. If even the slightest thing is wrong, it “phones home” to tell EMC’s engineers what’s happening. EMC gets 3,500 such “calls” from its machines and systems every day. Second, if a problem isn’t fixed within four hours, Leo Colborne, the vice president of global technical support, is notified. After six hours, Colborne’s boss, the senior vice president of global customer services, is contacted. After eight hours, the company’s CEO and chairman are notified. In most cases, the CEO will leave immediately to visit the customer, apologize for the problem, reassure the customer that everything is being done to solve the problem, and begin working with the customer to implement procedures or solutions to prevent the problem from recurring in the future.25 Finally, EMC provides quality service because of the empathy it has for its customers’ problems. Indeed, early in the company’s history, its customers’ businesses were suffering because EMC could not figure out why one of its bestselling systems had unexpectedly become unreliable. With key information systems frozen up, business ground to a halt for major customers. Rather than make excuses or empty promises, EMC gave its customers the choice between a brand new EMC computer system or a similar system, made by EMC’s competitor, IBM. At the height of its problems, EMC installed more of IBM’s
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machines than its own. But the company benefited in the long run as customers realized that EMC would do almost anything to solve their problems. And, once EMC solved the problems with that machine, customers trusted the company enough to begin ordering again. EMC’s CEO said, “What that proved to me, to all of us, was that when a customer believes in you, and you go to great lengths to preserve that relationship, they’ll stick with you almost no matter what. It opened our eyes to the power of customer service.”26
2.2 ISO 9000 and 14000 ISO, pronounced ice-o, comes from the Greek word isos, meaning equal, similar, alike, or identical. Thus, ISO 9000 is a series of five international standards, from ISO 9000 to ISO 9004, for achieving consistency in quality management and quality assurance in companies throughout the world. ISO 14000 is a series of international standards for managing, monitoring, and minimizing an organization’s harmful effects on the environment.27 (For more on environmental quality and issues, see Section 3.5 on controlling waste and pollution in Chapter 16.) The ISO 9000 and 14000 standards were created by the International Organization for Standardization, an international agency that helps set standards for 151 countries. The purpose of this agency is to develop and publish standards that facilitate the international exchange of goods and services.28 The ISO 9000 standards publications, which are available from the American National Standards Institute (see the end of this section), are general and can be used for manufacturing any kind of product or delivering any kind of service. Importantly, the ISO 9000 standards don’t describe how to make a better-quality car, computer, or widget. Instead, they describe how companies can extensively document (and thus standardize) the steps they take to create and improve the quality of their products. Why should companies go to the trouble to achieve ISO 9000 certification? The reason is that, increasingly, their customers want them to. In fact, studies show that customers clearly prefer to buy from companies that are ISO 9000 certified. Companies, in turn, believe that being ISO 9000 certified helps them keep customers who might otherwise switch to an ISO 9000 certified competitor.29 Typically, “getting” ISO 9000 means having your company certified for ISO 9000 registration by an accredited third party. ISO 9000 certification is similar to having a certified public accountant indicate that a company’s financial accounts are up-to-date and accurate. Like an accountant’s audit, the certification process can take months. But in this case, the certification is for quality, not accounting procedures. To become certified, a company must show that it is following its own procedures for improving production, updating design plans and specifications, keeping machinery in top condition, educating and training workers, and satisfactorily dealing with customer complaints.30 Once a company has been certified as ISO 9000 compliant, the accredited third party will issue an ISO 9000 certificate that the company can use in its advertising and publications. This is the quality equivalent of the “Good Housekeeping Seal of Approval.” Continued ISO 9000 certification is not guaranteed, however. Accredited third parties typically conduct periodic audits to make sure the company is still following quality procedures. If it is not, its certification is suspended or canceled. It’s estimated that more than half of mid-sized U.S. manufacturers have achieved ISO 9000 certification. Two-thirds of the certified companies say they wanted certification because it increases customer satisfaction. Accordingly, most advertise their ISO certification in their promotional materials and mention it on their Web site; some post their ISO 9000 certificate there as well. For example, Midmark Medical Equipment, a maker of examination
ISO 9000 A series of five international standards, from ISO 9000 to ISO 9004, for achieving consistency in quality management and quality assurance in companies throughout the world.
ISO 14000 A series of international standards for managing, monitoring, and minimizing an organization’s harmful effects on the environment.
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tables, sterilizers, electrocardiograms, and the like, has posted its certificate at http://www.midmark.com/iso9000.asp and states, “Midmark is proud to have the distinction of receiving the ISO 9001 certification for quality.” See the American National Standards Institute (http://www.ansi.org; the ISO 9000 and ISO 14000 standards publications are available here for about $600 and $100, respectively), the American Society for Quality (http://www.asq.org), and the International Organization for Standardization (http://www.iso.ch) for additional information on ISO 9000 guidelines and procedures.
2.3 Baldrige National Quality Award
Exhibit 18.5 Latest Baldrige National Quality Award Recipients
The Baldrige National Quality Award, which is administered by the U.S. government’s National Institute for Standards and Technology, is given “to recognize U.S. companies for their achievements in quality and business performance and to raise awareness about the importance of quality and performance excellence as a competitive edge.”31 Each year, up to three awards may be given in these categories: manufacturing, service, small business, education, and healthcare (the latter two categories were added in 1999). Exhibit 18.5 lists the latest Baldrige Award winners. The cost of applying for the Baldrige Award is $5,000 for manufacturing and service companies and $2,000 for small businesses.32 At a minimum, each company that applies receives an extensive report based on 300 hours of assessment from at least eight business and quality experts. At $6.67 an hour for small businesses and about $16.67 an hour for manufacturing and service businesses, the Journal for Quality and Participation called the Baldrige feedback report “the best bargain in consulting in America.”33 Arnold Weimerskirch, former chair of the Baldrige Award panel of judges and vice president of quality at Honeywell, says “The application and review process for the Baldrige Award is the best, most cost-effective and comprehensive business health audit you can get.”34 The criteria for the Baldrige Award are different for business, education, and health-care organizations. As shown in Exhibit 18.6, businesses that apply for the Baldrige Award are judged on a 1,000-point scale based on seven criteria: leadership; strategic planning; customer and market focus; measurement, analysis, and knowledge management; human resource focus; process management; and business results.35 With 450 out of 1,000 points, “business results” are clearly the most important. In other words, in addition to the six other criteria, companies must show that they have achieved superior quality when it comes to products and services, customers, financial performance and market share, treatment of employees, organizational effectiveness, and leadership and social responsibility. This emphasis on “results” is what differentiates the Baldrige Award from the
Sector
2003 Winner
2004 Winner
Manufacturing
Medrad, Inc.
The Bama Companies, Inc.
Education
Community Consolidated School District 15
Kenneth W. Monfort College of Business
Health care
Saint Luke’s Hospital of Kansas City Baptist Hospital, Inc.
Robert Wood Johnson University Hospital, Hamilton, Ohio
Service
Caterpillar Financial Services Corporation, U.S. Boeing Aerospace Support
(No winner)
Small business
Stoner, Inc.
Texas Nameplate
Source: “1988–2004 Award Recipients’ Contacts and Profiles,” National Institute for Standards and Technology, [Online] available at http://www.quality.nist.gov/Contacts_Profiles.htm, 2 July 2005.
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ISO 9000 standards. The Baldrige Award indicates the extent to which companies have actually achieved world-class quality. The ISO 9000 standards simply indicate whether a company is following the management system it put in place to improve quality. In fact, ISO 9000 certification covers less than 10 percent of the requirements for the Baldrige Award.36 Why should companies go to the trouble of applying for the Baldrige Award? Earnest Deavenport, chairman and CEO of Eastman Chemical, explains, “Eastman, like other Baldrige Award winners, didn’t apply the concepts of total quality management to win an award. We did it to win customers. We did it to grow. We did it to prosper and to remain competitive in a world marketplace.”37 Furthermore, the companies that have won the Baldrige Award have achieved superior financial returns. Since 1988, an investment in Baldrige Award winners would have outperformed the Standard & Poor’s 500 stock index 80 percent of the time.38 For additional information about the Baldrige Award, see the National Institute of Standards and Technology Web site at http://www.quality.nist.gov.
2.4 Total Quality Management Total quality management (TQM) is an integrated organization-
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2005 CATEGORIES/ITEMS
POINT VALUES
1 LEADERSHIP Senior Leadership Governance and Social Responsibilities
(120) 70 50
2 STRATEGIC PLANNING Strategy Development Strategy Deployment
(85) 40 45
3 CUSTOMER AND MARKET FOCUS Customer and Market Knowledge Customer Relationships and Satisfaction
(85) 40 45
4 MEASUREMENT, ANALYSIS, & KNOWLEDGE MANAGEMENT (90) Measurement, Analysis, and Review of Organizational Performance 45 Information and Knowledge Management 45 5 HUMAN RESOURCE FOCUS Work Systems Employee Learning and Motivation Employee Well-Being and Satisfaction
(85) 35 25 25
6 PROCESS MANAGEMENT Value Creation Processes Support Processes and Operational Planning
(85) 45 40
wide strategy for improving product and service quality.39 TQM is not a specific tool or technique. Rather, TQM is a 7 BUSINESS RESULTS (450) philosophy or overall approach to management that is charProduct and Service Outcomes 100 acterized by three principles: customer focus and satisfacCustomer-Focused Results 70 40 tion, continuous improvement, and teamwork. Financial and Market Results 70 Contrary to most economists, accountants, and Human Resource Results 70 financiers who argue that companies exist to earn profits Organizational Effectiveness Results 70 for shareholders, TQM suggests that customer focus and Leadership and Social Responsibility Results 70 customer satisfaction should be a company’s primary goals. Customer focus means that the entire organization, TOTAL POINTS 1,000 from top to bottom, should be focused on meeting customers’ needs. The result of that customer focus should be Source: “Criteria for Performance Excellence,” Baldrige National Quality Program [Online] available at http://www.quality.nist.gov/PDF_files/2003_Business_ customer satisfaction, which occurs when the company’s 2005, Criteria.pdf, 2 July 2005. products or services meet or exceed customers’ expectaExhibit 18.6 tions. At companies where TQM is taken seriously, such as Enterprise Rent-a- Criteria for the Baldrige National Car, paychecks and promotions depend on keeping customers satisfied.41 For Quality Award example, Enterprise Rent-a-Car measures customer satisfaction with a detailed total quality management (TQM) survey called the Enterprise Service Quality index. Enterprise not only ranks An integrated, principle-based, each branch office by operating profits and customer satisfaction, but it also organization-wide strategy for makes promotions to higher-paying jobs contingent on above-average customer improving product and service quality. satisfaction scores. According to Andy Taylor, Enterprise’s chairman and CEO, customer focus “Once we showed we were serious—a couple of star performers who had An organizational goal to concentrate achieved good growth and profit numbers but had generated below-average sat- on meeting customers’ needs at all levels of the organization. isfaction scores were passed over for promotions—all doubt about the impor42 tance of the scores vanished.” Not surprisingly, this emphasis on quality in- customer satisfaction creased the number of completely satisfied Enterprise Rent-a-Car customers An organizational goal to provide products or services that meet or (who are three times more likely to rent a car again) from the high 60 percent exceed customers’ expectations. range to the high 70 percent range in just five years. Continuous improvement is an ongoing commitment to increase product and ser- continuous improvement An organization’s ongoing commitment vice quality by constantly assessing and improving the processes and procedures to constantly assess and improve the used to create those products and services. How do companies know whether processes and procedures used to they’re achieving continuous improvement? Besides higher customer satisfaction, create products and services.
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continuous improvement is usually associated with a reduction in variation. Variation is a deviation in the form, condition, or appearance of a product from the quality standard for that 5 Sigma 230 product. The less a product varies from the quality standard, or the more consistently a 4 Sigma 6,210 company’s products meet a quality standard, the higher the quality. At Freudenberg-NOK, a 3 Sigma 66,800 manufacturer of seals and gaskets for the automotive industry, continuous improvement means shooting for a goal of “six sigma” qual308,538 2 Sigma ity, meaning just 3.4 defective or nonstandard parts per million (PPM). Achieving this goal 1 Sigma 690,000 would eliminate almost all product variation. In a recent year, Freudenberg-NOK made over 0 50,000 150,000 250,000 350,000 450,000 550,000 650,000 750,000 200 million seals and gaskets with a defect rate of 9 PPM.43 As Exhibit 18.7 shows, this almost Defects per Million Parts puts Freudenberg-NOK at “six sigma,” or 3.4 defective PPM. Furthermore, this represents a Exhibit 18.7 Number of Defects per Million with significant improvement from seven years ago when Freudenberg-NOKwas averSix Sigma Quality aging 650 defective PPM. General manager Gary VanWambeke says, “The whole so Freudenberg-NOK expects the quality of its prodvariation goal is variation reduction,” 44 ucts to continue to improve. A deviation in the form, condition, or The third principle of TQM is teamwork. Teamwork means collaboration appearance of a product from the quality standard for that product. between managers and nonmanagers, across business functions, and between the company and its customers and suppliers. In short, quality improves when teamwork everyone in the company is given the incentive to work together and the responCollaboration between managers and sibility and authority to make improvements and solve problems. At Valassis, a nonmanagers, across business functions, and between companies, printing company long famous for its use of teams, management turned to customers, and suppliers. employees for additional suggestions when business fell during a recession. Teams offered so many ideas to cut costs and raise quality that the company was able to avoid layoffs.45 Together, customer focus and satisfaction, continuous improvement, and teamwork mutually reinforce each other to improve quality throughout a company. Customer-focused continuous improvement is necessary to increase customer satisfaction. At the same time, continuous improvement depends on teamwork from different functional and hierarchical parts of the company. 6 Sigma
3.4
Review 2: Quality Quality can mean a product or service free of deficiencies or the characteristics of a product or service that satisfy customer needs. Quality products usually possess three characteristics: reliability, serviceability, and durability. Quality service means reliability, tangibles, responsiveness, assurance, and empathy. ISO 9000 is a series of five international standards for achieving consistency in quality management and quality assurance, while ISO 14000 is a set of standards for minimizing an organization’s harmful effects on the environment. The ISO 9000 standards can be used for any product or service because they ensure that companies carefully document the steps they take to create and improve quality. ISO 9000 certification is awarded following a quality audit from an accredited third party. The Baldrige National Quality Award recognizes U.S. companies for their achievements in quality and business performance. Each year, three Baldrige Awards may be given for manufacturing, service, small business, education, and health care. Companies that apply for the Baldrige Award are judged on a 1,000-point scale based on leadership; strategic planning; customer and market focus; measurement, analysis, and knowledge management; human resource focus; process management; and business results. Total quality management (TQM) is an integrated organization-wide strategy for improving
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product and service quality. TQM is based on three mutually reinforcing principles: customer focus and satisfaction, continuous improvement, and teamwork.
Managing Operations At the start of this chapter, you learned that operations management means managing the daily production of goods and services. Then you learned that to manage production, you must oversee the factors that affect productivity and quality. In this half of the chapter, you will learn about managing operations in service and manufacturing businesses. The chapter ends with a discussion of inventory management, a key factor in a company’s profitability. 3 4 5
3
After reading the next three sections, you should be able to explain the essentials of managing a service business. describe the different kinds of manufacturing operations. explain why and how companies should manage inventory levels.
SERVICE OPERATIONS
Imagine that your trusty VCR breaks down as you try to record your favorite TV show. (You’re still saving your money for a TiVo.) You’ve got two choices. You can run to Wal-Mart and spend $45 to $75 to purchase a new VCR, or you can spend about the same amount (you hope) to have it fixed at a repair shop. Either way you end up with the same thing, a working VCR. However, the first choice, getting a new VCR, involves buying a physical product (a “good”), while the second, dealing with a repair shop, involves buying a service. Services differ from goods in several ways. First, goods are produced or made, but services are performed. In other words, services are almost always laborintensive: someone typically has to perform the service for you. A repair shop could give you the parts needed to repair your old VCR, but without the technician to perform the repairs, you’re still going to have a broken VCR. Second, goods are tangible, but services are intangible. You can touch and see that new VCR, but you can’t touch or see the service provided by the technician who fixed your old VCR. All you can “see” is that the VCR works. Third, services are perishable and unstorable. If you don’t use them when they’re available, they’re wasted. For example, if your VCR repair shop is backlogged on repair jobs, then you’ll just have to wait until next week to get your VCR repaired. You can’t store an unused service and use it when you like. By contrast, you can purchase a good, such as motor oil, and store it until you’re ready to use it. Finally, services account for 57.2 percent of gross national product whereas manufacturing accounts for only 32.7 percent.46 So any review of operations management would be incomplete without an examination of how to manage service operations. Because services are different from goods, managing a service operation is different from managing a manufacturing or production operation. Let’s look at 3.1 the serviceprofit chain and 3.2 service recovery and empowerment.
3.1 The Service-Profit Chain One of the key assumptions in the service business is that success depends on how well employees, that is, service providers, deliver their services to customers. However, the concept of the service-profit chain, depicted in Exhibit 18.8, suggests that in service businesses, success begins with how well management treats service employees.47 The first step in the service-profit chain is internal service quality, meaning the quality of treatment that employees receive from a company’s internal service
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providers, such as management, payroll and benefits, human resources, and so Employee forth. For example, Southwest Airlines is Satisfaction legendary for its positive culture and, to the surprise of many, its excellent customer serService High Value vice. Southwest’s Chairman Herb Kelleher ✔Customer Satisfaction said, “In the old days, my mother told me Capability Service ✔Customer Loyalty that in business school they’d say, ‘This is a lead to real conundrum: Who comes first, your employees, your shareholders, or your customers?’ My mother taught me that your Upper Employees Customers employees come first. If you treat them Management well, then they treat the customers well, and that means your customers come back and your shareholders are happy.”48 Profit & Growth Sources: R. Hallowell, L. A. Schlesinger, & J. Zornitsky, “Internal Service Quality, Customer and Job SatisExhibit 18.9 defines the elements that faction: Linkages and Implications for Management,” Human Resource Planning 19 (1996): 20–31; J. L. constitute good internal service quality. For Heskett, T. O. Jones, G. W. Loveman, W. E. Sasser, Jr., & L. A. Schlesinger, “Putting the Service-Profit employees to do a good job serving cusChain to Work,” Harvard Business Review, March–April 1994, 164–174. tomers, management must implement poliExhibit 18.8 cies and procedures that support good customer service; provide workers the Service-Profit Chain tools and training they need to do their jobs; reward, recognize, and support good customer service; facilitate communication; and encourage people and departments to work together as teams to accomplish company goals with respect to internal service quality and customer service. For example, at CVS, a large drugstore chain, the first step was to reward good customer service. CEO Tom Ryan says, “My bonus, the store manager’s bonus, the assistant manager’s bonus, the guys in IS . . . a significant amount is based on customer service. We are 100 percent focused on it, and we are passionate about it.” As the second step, CVS developed a special monthly scorecard to measure and reward interExhibit 18.9 nal service quality for 19 different areas in the company. Executive vice presiComponents of Internal dent Deborah Ellinger explains, “The [internal] service ethic is something that Service Quality we think is important throughout the company. We can’t expect our stores to be good at Policies and Procedures Do policies and procedures facilitate [customer] service if we don’t provide them serving customers? with good [internal] service.”49 Since CVS inTools Has the organization provided service stituted the monthly scorecard, internal service employees the tools they need to serve quality ratings are up by 30 percent.50 customers? As depicted in Exhibit 18.8, good internal service leads to employee satisfaction and serEffective Training Is effective, useful, job-specific training vice capability. Employee satisfaction occurs made available in a timely fashion? when companies treat employees in a way that Rewards and Recognition Are individuals rewarded and/or meets or exceeds their expectations. In other recognized for good performance? words, the better employees are treated, the Communication Does necessary communication occur more satisfied they are, and the more likely both vertically and horizontally they are to give high-value service that satisfies throughout the organization? customers. Management Support Does management aid (versus hinder) Service capability is an employee’s percepemployees’ ability to serve customers? tion of his or her ability to serve customers well. When an organization serves its employGoal Alignment Are the goals of senior management ees in ways that help them to do their jobs aligned with the goals of front-line service well, employees, in turn, are more likely to beemployees? lieve that they can and ought to provide highTeamwork Do individuals and departments engage in value service to customers. Again, Southwest teamwork when necessary? Airlines not only treats its employees well, but Source: R. Hallowell, L. A. Schlesinger, & J. Zornitsky, “Internal Service Quality, Customer and Job also takes a number of direct steps to Satisfaction: Linkages and Implications for Management,” Human Resource Planning 19 (1996): strengthen their service capability. Chairman 20–31. Internal Service Quality
=
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Herb Kelleher says, “I can’t anticipate all of the situations that will arise at the stations [airport terminals] across our system. So what we tell our people is, ‘Hey, we can’t anticipate all of these things; you handle them the best way possible. You make a judgment and use your discretion; we trust you’ll do the right thing. If we think you’ve done something erroneous, we’ll let you know—without criticism, without backbiting.’”51 Finally, according to the service-profit chain shown in Exhibit 18.8, highvalue service leads to customer satisfaction and customer loyalty, which, in turn, lead to long-term profits and growth. What’s the link between customer satisfaction and loyalty and profits? To start, the average business keeps only 70 to 90 percent of its existing customers each year. No big deal, you say? Just replace leaving customers with new customers. Well, there’s one significant problem with that solution. It costs five times as much to find a new customer as it does to keep an existing customer. Also, new customers typically buy only 20 percent as much as established customers. In fact, keeping existing customers is so cost-effective that most businesses could double their profits by simply keeping 5 percent more customers per year!52 One service company that understands the relationship between high-value service, customer loyalty, and profits is USAA, a Texas-based finance/insurance company. When USAA’s customers have young children, it sends them booklets on how to save for a college education. When its customers near the age of 50, it contacts them about retirement and estate planning. And when it issues credit cards to college students, it takes the time to teach them how to manage their credit and avoid excessive credit card debt. Says USAA vice president Phyllis Stahle, “We build loyalty by convincing [customers] we’re loyal to them.”53 Indeed, USAA has a 97 percent customer retention rate!
service recovery Restoring customer satisfaction to strongly dissatisfied customers.
3.2 Service Recovery and Empowerment PROTECT YOUR FRONT-LINE STAFF: THE CUSTOMER ISN’T ALWAYS RIGHT In 1909, Harry Gordon Selfridge, an American who founded London’s famous Selfridge’s department store, coined the phrase, “The customer is always right.” Though managers and employees should do what they can to provide great service and make up for mistakes with great service recovery, the customer isn’t always right. Companies should fire customers who use foul language, make threats against employees or other customers, lie, demand unethical or illegal service, try to bully front-line employees into granting special favors, or are just generally belligerent. Management consultant John Curtis says, “If you don’t [fire these customers], you’re telling your employees and your other customers that you care more about money than the safety of the people in the business.” So, do the right thing. Protect your front-line staff by telling bad customers that you won’t tolerate these kinds of behavior. Ask them to leave. Close their accounts. Inform them that they’ll need to go elsewhere.56
HE R IGHT T G T H I IN NG DO
When mistakes are made, when problems occur, and when customers become dissatisfied with the service they’ve received, service businesses must switch from the process of service delivery to the process of service recovery, that is, restoring customer satisfaction to strongly dissatisfied customers.54 Sometimes, service recovery requires service employees to not only fix whatever mistake was made, but also perform “heroic” service acts that “delight” highly dissatisfied customers by far surpassing their expectations of fair treatment. When accountant Tom Taylor checked into his room at a Hampton Inn in Greenville, South Carolina, he wasn’t happy. The company Web site had given him incorrect directions. The lights in his room weren’t plugged in. The shower controls were backwards—“hot” was “cold” and “cold” was “hot.” And the air-conditioning was malfunctioning, so his room was freezing cold. When he complained, the employee at the front desk immediately offered him two free nights of lodging. Taylor was delighted by the offer, but since he thought it was excessive, he took just one free night.55 Unfortunately, when mistakes occur, service employees often don’t have the discretion to resolve customer complaints. Customers who want service employees to correct or make up for poor service are frequently told, “I’m not allowed to do that,” “I’m just following company rules,” or “I’m sorry, only managers are allowed to make changes of any kind.” In other words, company rules prevent them from engaging in acts of service recovery meant to turn dissatisfied customers back into
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COSTS 1. Finding service workers who are capable of solving problems and dealing with upset customers increases selection costs. 2. Training service workers to solve different kinds of problems entails increased costs. 3. Higher wages are needed to attract and keep talented service workers. 4. A focus on service recovery may lead to less emphasis on service reliability, doing it right the first time. Ultimately, this could lead to slower delivery of services. 5. In their quest to please customers, empowered service workers may cost the company money by being too eager to provide “giveaways” to make up for poor or slow service. 6. Empowered service workers may unintentionally treat customers unfairly by occasionally being overly generous to make up for poor or slow service. BENEFITS 1. Responses to customer complaints and problems are quicker. 2. Employees feel better about their jobs and themselves. 3. Employee interaction with customers will be warm and enthusiastic. 4. Employees are more likely to offer ideas for improving service or preventing problems. 5. Empowered employees who provide service recovery lead to great word-of-mouth advertising and customer retention. 6. Satisfied employees who take good care of customers are more likely to stay with the company. Sources: D. E. Bowen & E. E. Lawler III, “The Empowerment of Service Workers: What, Why, How, and When,” Sloan Management Review 33 (Spring 1992): 31–39; S. Kundu & J. Vora, “Creating a Talented Workforce for Delivering Service Quality,” Human Resource Planning 27 (1 January 2004): 40.
Exhibit 18.10 Costs and Benefits of Empowering Service Workers for Service Recovery
satisfied customers. The result is frustration for customers and service employees and lost customers for the company. Now, however, many companies are empowering their service employees.57 In Chapter 9, you learned that empowering workers means permanently passing decision-making authority and responsibility from managers to workers. With respect to service recovery, empowering workers means giving service employees the authority and responsibility to make decisions that immediately solve customer problems.58 At Hampton Inn, all employees are empowered to solve customer problems. Senior vice president Phil Cordell says, “You don’t have to call an 800 number. Just mention it at the front desk or to any employee—a housekeeper, maintenance person or breakfast hostess— and, on the spot, your stay is free.”59 In short, the purpose of empowering service employees is zero customer defections, that is, to turn dissatisfied customers back into satisfied customers who continue to do business with the company. Empowering service workers does entail some costs, although they are usually less than the company’s savings from retaining customers. For example, over a typical year, Hampton Inn will give back 0.5 percent of its room rental charges to dissatisfied customers. But, according to Cordell, service recovery pays off because every dollar refunded to disgruntled customers results in a $7 payoff as those formerly dissatisfied customers return to Hampton Inn or tell their friends to stay at Hampton Inn because they were treated so well.60 Exhibit 18.10 describes some costs and benefits of empowering service workers to act in ways that they believe will accomplish service recovery.
Review 3: Service Operations Services are different from goods. Goods are produced, tangible, and storable. Services are performed, intangible, and perishable. Likewise, managing service operations is different from managing production operations. The service-profit chain indicates that success begins with internal service quality, meaning how well management treats service employees. Internal service quality leads to employee satisfaction and service capability, which, in turn, lead to high-value service to customers, customer satisfaction, customer loyalty, and long-term profits and growth. Keeping existing customers is far more cost-effective than finding new ones. Consequently, to prevent disgruntled customers from leaving, some companies are empowering service employees to perform service recovery—restoring customer satisfaction to strongly dissatisfied customers—by giving them the authority and responsibility to immediately solve customer problems. The hope is that empowered service recovery will prevent customer defections. 4
MANUFACTURING OPERATIONS
DaimlerChrysler makes cars, and Dell does computers. Shell produces gasoline, whereas Sherwin-Williams makes paint. Boeing makes jet planes, but Budweiser makes beer. Maxtor makes hard drives, and Maytag makes appliances. The
Chapter 18: Managing Service and Manufacturing Operations
manufacturing operations of these companies all produce physical goods. But not all manufacturing operations, especially these, are the same. Let’s learn how various manufacturing operations differ in terms of 4.1 the amount of processing that is done to produce and assemble a product and 4.2 the flexibility to change the number, kind, and characteristics of products that are produced.
4.1 Amount of Processing in Manufacturing Operations As Exhibit 18.11 shows, manufacturing operations can be classified according to the amount of processing or assembly that occurs after a customer order is received. The highest degree of processing occurs in make-to-order operations. A make-to-order operation does not start processing or assembling products until it receives a customer order. In fact, some make-to-order operations may not even order parts until a customer order is received. Not surprisingly, make-to-order operations produce or assemble highly specialized or customized products for customers. For example, Dell, Inc. has one of the most advanced make-to-order operations in the computer business. Dell has no finished goods inventory—it does not build a computer until someone buys it. Because Dell doesn’t order parts from suppliers until machines are purchased, its computers always have the latest, most advanced components. No one who buys a Dell computer gets stuck with old technology. Also, because prices of computer components tend to fall, Dell’s make-to-order operation can pass on price cuts to customers. Plus, Dell can customize all of its orders, big and small. So whether you’re ordering 5,000 personal computers for your company or just one personal computer for your home, Dell doesn’t make the computers until you order them. A moderate degree of processing occurs in assemble-to-order operations. A company using an assemble-to-order operation divides its manufacturing or assembly process into separate parts or modules. The company orders parts and assembles modules ahead of customer orders. Then, based on actual customer orders or on research forecasting what customers will want, those modules are combined to create semicustomized products. For example, when a customer orders a new car, General Motors may have already ordered the basic parts or modules it needs from suppliers. In other words, based on sales forecasts, GM may already have ordered enough tires, air-conditioning compressors, brake systems, and seats from suppliers to accommodate nearly all customer orders on a particular day. Special orders from customers and car dealers are then used to determine the final assembly checklist for particular cars as they move down the assembly line. The lowest degree of processing occurs in make-to-stock operations (also called build-to-stock). Because the products are standardized, meaning each product is exactly the same as the next, a company using a make-to-stock operation starts ordering parts and assembling finished products before receiving customer orders. Customers then purchase these standardized products, such as Rubbermaid storage containers, microwave ovens, and vacuum cleaners, at retail stores or directly from the manufacturer. Because parts are ordered and products are assembled before customers order the products, make-to-stock operations are highly dependent on the accuracy of sales forecasts. If sales forecasts are incorrect, make-to-stock operations may end up building too many or too few products, or they may make products with the wrong features or without the features that customers want. These disadvantages are leading many companies to move from make-tostock to build-to-order systems. Mark Simons, a vice president at Toshiba, says, “Toshiba is expanding beyond make-to-stock systems and offering a quick and easy way to customize a notebook to fit the individual needs of our customers.
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More Processing
Make-to-Order Operations
Assemble-to-Order Operations
Make-to-Stock Operations
Less Processing
Exhibit 18.11 Processing in Manufacturing Operations
make-to-order operation A manufacturing operation that does not start processing or assembling products until a customer order is received.
assemble-to-order operation A manufacturing operation that divides manufacturing processes into separate parts or modules that are combined to create semicustomized products.
make-to-stock operation A manufacturing operation that orders parts and assembles standardized products before receiving customer orders.
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LEAST FLEXIBLE Continuous-Flow Production
Line-Flow Production
We’ve listened to our customers’ feedback and are answering their call to have direct access to Toshiba mobile technology on various levels and at all times.”61
4.2 Flexibility of Manufacturing Operations A second way to categorize manufacturing operations is by manufacturing flexibility, meaning the degree to which manufacturing
MIKE MERGEN/ BLOOMBERG NEWS/ LANDOV
operations can easily and quickly change the number, kind, and characteristics of products they produce. Flexibility allows compaBatch nies to respond quickly to changes in the marketplace (i.e., Production competitors and customers) and to reduce the lead time between ordering and final delivery of products. There is often a tradeoff Job between flexibility and cost, however, with the most flexible manuShops facturing operations frequently having higher costs per unit and the least flexible operations having lower costs per unit.62 Exhibit Project 18.12 shows different types of manufacturing operations arranged Manufacturing in order from the least flexible to the most flexible: continuousflow production, line-flow production, batch production, job MOST FLEXIBLE shops, and project manufacturing. Most production processes generate finished products at a discrete rate. A product is completed, and then, perhaps a few Exhibit 18.12 seconds, minutes, or hours later, another is completed, and so on. For instance, Flexibility of Manufacturing Operations if you stood at the end of an automobile assembly line, nothing much would seem to be happening for 55 seconds of every minute. In that last 5 seconds, however, a new car would be started and driven off the assembly line, ready for its new owner. By contrast, in continuous-flow production, products are produced continuously, rather than at a discrete rate. Like a water hose that is never manufacturing flexibility turned off and just keeps on flowing, production of the final product never The degree to which manufacturing operations can easily and quickly stops. In other words, the product is always and continuously being produced. change the number, kind, and Liquid chemicals and petroleum products are examples of continuous-flow procharacteristics of products they duction. If you’re still struggling with this concept (and it can be confusing), produce. think of PlayDoh. Continuous-flow production is similar to squeezing PlayDoh into a toy press and watching the various shapes ooze out of the “PlayDoh maJust Born, maker of Marshmallow chine.” With continuous-flow production, the PlayDoh machine would never Peeps, uses a line flow system that is stop oozing or producing rectangle- or triangle-shaped PlayDoh. Because of also somewhat flexible. For example, their complexity, continuous-flow production processes are the most standardby changing the mold in one part of the production line, the company can ized and least flexible manufacturing operations. Line-flow production processes are preestablished, occur in a serial or linear switch from making its hallmark Peep Chicks and Bunnies to making manner, and are dedicated to making one type of product. In this way, the 10 new shapes, like the pumpkins different steps required to make product X can be completed in a separate shown here. manufacturing process (with separate machines, parts, treatments, locations, and workers) from the 12 different steps required to make product Y. Line-flow production processes are inflexible because they are typically dedicated to manufacturing one kind of product. For example, nearly every city has a local bottling plant for soft drinks or beer. The processes or steps in bottling plants are serial, meaning they must occur in a particular order. For example, after empty bottles are sterilized, they are filled with soft drinks or beer using a special dispenser that distributes the liquid down the inside walls of the bottle. This fills the bottle from the bottom up and displaces the air that was in the bottle. The bottles are then crowned or
Chapter 18: Managing Service and Manufacturing Operations
capped, checked for underfilling and missing caps, labeled, inspected a final time for fill levels and missing labels, and then placed in cases that are shrinkwrapped on pallets and put on trucks for delivery.63 The next most flexible manufacturing operation is batch production, which involves the manufacture of large batches of different products in standard lot sizes. Consequently, a worker in a batch production operation will perform the same manufacturing process on 100 copies of product X, followed by 200 copies of product Y, and then 50 copies of product Q. Furthermore, these “batches” move through each manufacturing department or process in identical order. So, if the paint department follows chemical treatment, and chemical treatment is now processing a batch of 50 copies of product Q, then the paint department’s next task will be to paint 50 copies of product Q. Batch production is finding increasing use among restaurant chains. To ensure consistency in the taste and quality of their products, many restaurants have central kitchens, or commissaries, that produce batches of food, such as mashed potatoes, stuffing, macaroni and cheese, rice, quiche filling, and chili, in volumes ranging from 10 to 200 gallons. These batches are then delivered to restaurants, which serve the food to customers. Next in terms of flexibility is the job shop. Job shops are typically small manufacturing operations that handle special manufacturing processes or jobs. In contrast to batch production, which handles large batches of different products, job shops typically handle very small batches, some as small as one product or process per “batch.” Basically, each “job” in a job shop is different, and once a job is done, the job shop moves on to a completely different job or manufacturing process for, most likely, a different customer. For example, Leggett & Platt Machine Products in Carthage, Missouri, is a job shop that makes coil springs, innerspring units, welded metal grids, and various other parts for mattress manufacturers around the world. Since its inception, its 225 employees have made over 25,000 different parts; in other words, they have completed 25,000 different jobs for customers.64 Another example of a job shop is Heil Trailer International in Athens, Tennessee. Heil specializes in the production of custom truck trailers that carry petroleum or dry bulk. Heil also makes intermodal trailers that can be pulled by trucks and transported by trains. Steve Slaughter, Heil’s general manager, says, “Even when we get orders for multiple trailers, the trailers normally aren’t the same. The shape of the tank itself doesn’t really change that much. But with all the different weight laws and customer preferences, it’s unusual to see two identical trailers going down the same assembly line.”65 The most flexible manufacturing operation is project manufacturing. Project manufacturing is an operation designed to produce large, expensive, specialized products like custom homes; military systems such as aircraft carriers and submarines; and aerospace products such as passenger planes and the space shuttle. Project manufacturing is highly flexible because each project is usually significantly different from the one before it, even if the projects involve the same general type of product, such as a submarine. Because of each project’s size, expense, and high degree of customization, project manufacturing can take an extremely long time to complete. For instance, General Dynamics uses project manufacturing when making new submarines. The U.S. Navy’s Virginia class subs, which are its newest and most advanced attack submarines, are 377 feet long and able to attain speeds greater than 25 knots (28 miles per hour/46.3 kilometers per hour). Therefore, they will be significantly quieter and faster than the Los Angeles class submarines that they replace.66 Project manufacturing is required for submarine construction because of the tremendous cost ($1.6 billion each), the complexity of the subs, and the length of time it takes to complete a new submarine (six years). Because of these enormous challenges, only one new Virginia class submarine is being completed each year.
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continuous-flow production A manufacturing operation that produces goods at a continuous, rather than a discrete, rate.
line-flow production Manufacturing processes that are preestablished, occur in a serial or linear manner, and are dedicated to making one type of product.
batch production A manufacturing operation that produces goods in large batches in standard lot sizes.
job shops Manufacturing operations that handle custom orders or small batch jobs.
project manufacturing Manufacturing operations designed to produce large, expensive, specialized products.
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Review 4: Manufacturing Operations Manufacturing operations produce physical goods. Manufacturing operations can be classified according to the amount of processing or assembly that occurs after receiving an order from customers. Make-to-order operations, in which assembly doesn’t begin until products are ordered, involve the most processing. The next-highest degree of processing occurs in assemble-to-order operations, in which preassembled modules are combined after orders are received to produce semicustomized products. The least processing occurs in make-to-stock operations, in which standard parts are ordered, on the basis of sales forecasts, and assembled before orders are received. Manufacturing operations can also be classified in terms of flexibility, the degree to which the number, kind, and characteristics of products can easily and quickly be changed. Flexibility allows companies to respond quickly to competitors and customers and to reduce order lead times, but it can also lead to higher unit costs. Manufacturing operations can be arranged in order from the least to the most flexible as follows: continuous-flow production, line-flow production, batch production, job shops, and project manufacturing. 5
INVENTORY
When auto sales dropped by 16 percent, General Motors shut down 14 of its 29 assembly plants and laid off half of its workers for periods ranging from one to five weeks to reduce inventories and cut costs. GM had a 116-day supply of new trucks and sports utility vehicles on hand, well over its goal of a 72-day supply. Paul Ballew, a general director for market and industry analysis at GM, said, “With sales moderating, the industry had to work through this inventory bubble.”67 inventory
Inventory is the amount and number of raw materials, parts, and finished products that
The amount and number of raw materials, parts, and finished products that a company has in its possession.
a company has in its possession. General Motors made the mistake of having too much inventory on hand and had to close its plants to let existing sales draw down inventory levels to an acceptable and affordable level. In this section, you will learn about 5.1 the different types of inventory, 5.2 how to measure inventory levels, 5.3 the costs of maintaining an inventory, and 5.4 the different systems for managing inventory.
5.1 Types of Inventory
raw material inventories The basic inputs in a manufacturing process.
component parts inventories The basic parts used in manufacturing that are fabricated from raw materials.
work-in-process inventories Partially finished goods consisting of assembled component parts.
Exhibit 18.13 shows the four kinds of inventory a manufacturer stores: raw materials, component parts, work-in-process, and finished goods. The flow of inventory through a manufacturing plant begins when the purchasing department buys raw materials from vendors. Raw material inventories are the basic inputs in the manufacturing process. For example, to begin making a car, automobile manufacturers purchase raw materials like steel, iron, aluminum, copper, rubber, and unprocessed plastic. Next, raw materials are fabricated or processed into component parts inventories, meaning the basic parts used in manufacturing a product. For example, in an automobile plant, steel is fabricated or processed into a car’s body panels, and steel and iron are melted and shaped into engine parts like pistons or engine blocks. Component parts inventories are sometimes purchased directly from vendors. The component parts are then assembled to make unfinished work-in-process inventories, which are also known as partially finished goods. This process is also called initial assembly. For example, steel body panels are welded to each other and to the frame of the car to make a “unibody,” which comprises the unpainted interior frame and exterior structure of the car. Likewise, pistons, camshafts, and other engine parts are inserted into the engine block to create a working engine.
Chapter 18: Managing Service and Manufacturing Operations
Next, all the work-in-process inventories are assembled to create finished goods inventories, which are the final outputs of the manufacturing process. This process is also called final assembly. For a car, the engine, wheels, brake system, suspension, interior, and electrical system are assembled into a car’s painted unibody to make the working automobile, which is the factory’s finished product. In the last step in the process, the finished goods are sent to field warehouses, distribution centers, or wholesalers, and then to retailers for final sale to customers.
5.2 Measuring Inventory
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Manufacturing Plant
sing
ha
Purc
Raw Material Inventories Fabrication
Vendors Purch
asing
Component Parts Inventories Initial
Assembly
Work-inProcess Inventories
As you’ll learn below, uncontrolled inventory can lead to huge costs for a manufacturing Final Assembly operation. Consequently, managers need good Finished measures of inventory to prevent inventory Goods costs from becoming too large. Three basic Inventories measures of inventory are average aggregate inventory, weeks of supply, and inventory turnover. Field Distribution If you’ve ever worked in a retail store and Warehouses Centers had to “take inventory,” you probably weren’t too excited about the process of counting Wholesalers every item in the store and storeroom. It’s an extensive task. Fortunately, “taking inventory” is somewhat easier today because of bar Retailers codes that mark items and computers that can count and track them. Nonetheless, inventories still differ from day to day. For example, an inventory count taken at the beginning of Customers the month will likely be different from a count taken at the end of the month. Similarly, an inR. E. Markland, S. K. Vickery, & R. A. Davis, Operations Management, 2nd ed. (Mason, OH: ventory count taken on a Friday will differ Source: South-Western, 1998). Reprinted with permission. from a count taken on a Monday. Because of such differences, companies often measure Exhibit 18.13 average aggregate inventory, which is the average overall inventory during a par- Types of Inventory ticular time period. Average aggregate inventory for a month can be determined by simply averaging the inventory counts at the end of each business day for that finished goods inventories month. One way companies know whether they’re carrying too much or too lit- The final outputs of manufacturing tle inventory is to compare their average aggregate inventory to the industry av- operations. erage for aggregate inventory. For example, 72 days of inventory is the average average aggregate inventory for the automobile industry. Average overall inventory during a Inventory is also measured in terms of weeks of supply, meaning the number particular time period. of weeks it would take for a company to run out of its current supply of inventory. In general, there is an acceptable number of weeks of inventory for a particular kind of business. Too few weeks of inventory on hand, and a company risks a stockout—running out of inventory. During a recent holiday season, the busiest stockout shopping time of the year, retail and online stores ran out of Apple Computer’s The situation when a company runs out fast-selling iPods. Industry analyst Stephen Baker said, “Given how strong of finished product. demand has been all year you would have thought [Apple] would have gotten every last one they could into stores.”68 Apple issued a statement, saying, “To try to meet the high demand, we’re making and shipping iPods as fast as we can. So,
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if one store has run out, you may find iPods in another authorized iPod reseller.”69 Nevertheless, iPods were in such short supply that the iPod mini was selling for $380 on eBay, $130 over the suggested retail price. On the other hand, a business that has too many weeks of inventory on hand incurs high costs (discussed below). For example, companies that make the linerboard used for corrugated cardboard boxes typically have too much inventory when they have more than six weeks’ supply on hand; the right amount is about four weeks’ supply.70 Anything more than that results in excess inventory, which can be reduced only by cutting prices or temporarily stopping production. Another common inventory measure, inventory turnover, is the number of times per year that a company sells or “turns over” its average inventory. For example, if a company keeps an average of 100 finished widgets in inventory each month, and it sold 1,000 widgets this year, then it “turned” its inventory 10 times this year. In general, the higher the number of inventory “turns,” the better. In practice, a high turnover means that a company can continue its daily operations with just a small amount of inventory on hand. For example, let’s take two companies, A and B, which, over the course of a year, have identical inventory levels (520,000 widget parts and raw materials). If company A turns its inventories 26 times a year, it will completely replenish its inventory every two weeks and have an average inventory of 20,000 widget parts and raw materials. By contrast, if company B turns its inventories only two times a year, it will completely replenish its inventory every 26 weeks and have an average inventory of 260,000 widget parts and raw materials. So, by turning its inventory more often, company A has 92 percent less inventory on hand at any one time than company B. Across all kinds of manufacturing plants, the average number of inventory turns is approximately eight per year, as shown in Exhibit 18.14, although the average can be higher or lower for different industries.71 The exhibit also shows the inventory turn rates for some of the best companies in each industry (i.e., the 75th percentile). For example, whereas the average auto company turns its entire inventory 13 times per year, some of the best auto companies more than double that rate, turning their inventory 27.8 times per year, or once every two
inventory turnover The number of times per year that a company sells or “turns over” its average inventory.
Exhibit 18.14 Inventory Turn Rates across Industries 30
27.8
Average Inventory Turn Rate
Inventory Turn Rate
25
75th Percentile Inventory Turn Rate
20 16 15
13
10
10
9 7.2
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14
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t t s g ge ch ed al in en uc ra ag bles od bles Te m ery utic sh e i k l p v h i n P c a i e b a g A qu ch ac Pa ur er ur Hi Pu o l E Ma rm er ond sum D d C a n m N n a tri & Pha su s/ Co g us in on d d t C Goo In rin s
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Source: D. Drickhamer, “Zeroing in on World-Class,” Industry Week, November 2001, 36.
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weeks.72 For an auto company, turning inventory more frequently than the industry average can cut costs by several hundred million dollars per year. Finally, it should be pointed out that even make-to-order companies like Dell turn their inventory. In theory, make-to-order companies have no inventory. In fact, they’ve got inventory, but you have to measure it in hours. For example, in its factories, Dell turns its inventory 500 times a year, which means that on average it has 17 hours—that’s hours and not days—of inventory on hand in its factories.73
5.3 Costs of Maintaining an Inventory Maintaining an inventory incurs four kinds of costs: ordering, setup, holding, and stockout. Ordering cost is not the cost of the inventory itself, but the costs associated with ordering the inventory. It includes the costs of completing paperwork, manually entering data into a computer, making phone calls, getting competing bids, correcting mistakes, and simply determining when and how much new inventory should be reordered. For example, ordering costs are relatively high in the restaurant business because 80 percent of food service orders (in which restaurants reorder food supplies) are processed manually. It’s estimated that the food industry could save $6.6 billion if all restaurants converted to electronic data interchange (see Chapter 17), in which purchase and ordering information from one company’s computer system is automatically relayed to another company’s computer system. In fact, a number of restaurants and food service trade groups have formed an interest group called Efficient Foodservice Response to encourage restaurants and food suppliers to use EDI and other methods of electronic commerce.74 Setup cost is the cost of changing or adjusting a machine so that it can produce a different kind of inventory.75 For example, 3M uses the same production machinery to make several kinds of industrial tape, but it must adjust the machines whenever it switches from one kind of tape to another. There are two kinds of setup costs, downtime and lost efficiency. Downtime occurs whenever a machine is not being used to process inventory. So, if it takes five hours to switch a machine from processing one kind of inventory to another, then five hours of downtime have occurred. Downtime is costly because companies earn an economic return only when machines are actively turning raw materials into parts or parts into finished products. The second setup cost is lost efficiency. Typically, after a switchover, it takes some time to recalibrate a machine to its optimal settings. It may take several days of fine-tuning before a machine finally produces the number of high-quality parts that it is supposed to. Exhibit 18.15 illustrates the tradeoff between setup costs, meaning downtime and lost efficiency, and manufacturing flexibility, that is, the number of different products (or inventory) that can be processed or assembled on a particular machine. The data in Exhibit 18.15 assume that four hours of downtime and 3 percent lost efficiency occur each time a machine’s setup has to be changed from one product to another. So, as shown in the exhibit, each time a machine has to be changed to handle a different kind of inventory, setup costs (downtime and lost efficiency) rise. Holding cost, also known as carrying or storage cost, is the cost of keeping inventory until it is used or sold. Holding cost includes the cost of storage facilities, insurance to protect inventory from damage or theft, inventory taxes, the cost of obsolescence (holding inventory that is no longer useful to the company), and the opportunity cost of spending money on inventory that could have been spent elsewhere in the company. For example, it’s estimated that at any one time, U.S. airlines have a total of $60 billion worth of airplane parts in stock for maintenance, repair, and overhauling their planes. The holding cost for managing, storing, and purchasing these parts is nearly $12.5 billion—or roughly one-fifth of the cost of the parts themselves.76
ordering cost The costs associated with ordering inventory, including the cost of data entry, phone calls, obtaining bids, correcting mistakes, and determining when and how much inventory to order.
setup cost The costs of downtime and lost efficiency that occur when a machine is changed or adjusted to produce a different kind of inventory.
holding cost The cost of keeping inventory until it is used or sold, including storage, insurance, taxes, obsolescence, and opportunity costs.
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Exhibit 18.15 Trade-off between Setup Costs and Manufacturing Flexibility
16
16
14%
Downtime (read using left axis) 14
12%
12
12
10% 9%
10
8%
8
8
6%
6%
6
4%
4 4
Lost Efficiency
Downtime (Hours)
12%
Lost Efficiency (read using right axis)
3% 2%
2 0 0 1
0%
0% 2 3 4 Number of Products Produced per Machine
Less Flexible
More Flexible
Make to stock
The 6th installment in the Harry Potter series, The Half-Blood Prince, sold a record 6.9 million copies in its first 24 hours— averaging better than 250,000 sales per hour and smashing the record held by the previous Potter release. Scholastic Press issued a first print run of 13.5 million copies in order to avoid stockouts that plagued previous installments, which had much smaller print runs.
Assemble to order
Make to order
Stockout costs are the costs incurred when a company runs out of a product, as happened to Apple when it failed to have enough iPods during the Christmas shopping season. There are two basic kinds of stockout costs. First, the company incurs the transaction costs of overtime work, shipping, and the like in trying to quickly replace out-of-stock inventories with new inventories. The second and perhaps more damaging cost is the loss of customers’ goodwill when a company cannot deliver the products that it promised. Stockouts occur more often than you might think. “In the United States, the supermarket industry’s average out-of-stock rate (the percentage of items that are unavailable at a given time) is 7.9 percent, according to Market6 [a research firm] figures. More importantly, retailers can increase sales 4 percent if they eliminate their out-ofstocks. Items on promotion run at a much higher out-of-stock rate, 13.1 percent on average. Market6 estimates that in dollar terms, the problem of out-ofstocks in U.S. grocers’ top 25 product categories alone amounts to an average of $200,000 in missed revenue per year, per store.”77
5.4 Managing Inventory
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stockout costs The costs incurred when a company runs out of a product, including transaction costs to replace inventory and the loss of customers’ goodwill.
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Inventory management has two basic goals. The first is to avoid running out of stock and angering and dissatisfying customers. Consequently, this goal seeks to increase inventory levels to a “safe” level that won’t risk stockouts. The second is to efficiently reduce inventory levels and costs as much as possible without impairing daily operations. Thus, this goal seeks a minimum level of inventory. The following inventory management techniques— economic order quantity (EOQ), just-in-time inventory (JIT), and materials requirement planning (MRP)—are different ways of balancing these competing goals.
Chapter 18: Managing Service and Manufacturing Operations
Economic order quantity (EOQ) is a system of formulas that helps determine how much and how often inventory should be ordered. EOQ takes into account the overall demand (D) for a product while trying to minimize ordering costs (O) and holding costs (H). The formula for EOQ is
EOQ 5
605
economic order quantity (EOQ) A system of formulas that minimizes ordering and holding costs and helps determine how much and how often inventory should be ordered.
2DO Å 4
For example, if a factory uses 40,000 gallons of paint a year (D), ordering costs (O) are $75 per order, and holding costs (H) are $4 per gallon, then the optimal quantity to order is 1,225 gallons: EOQ 5
Å
2(40,000) (75) 5 1,225 4
And, with 40,000 gallons of paint being used per year, the factory uses approximately 110 gallons per day: 40,000 gallons 5 110 365 days Consequently, the factory would order 1,225 new gallons of paint approximately every 11 days: 1,225 gallons 5 11.1days 110 gallons per day In general, EOQ formulas do a good job of letting managers know what size or amount of inventory they should reorder to minimize ordering and holding costs. However, EOQ formulas and models can become much more complex as adjustments are made for price changes, quantity discounts, setup costs, and many other factors.78 While EOQ formulas try to minimize holding and ordering costs, the just-intime (JIT) approach to inventory management attempts to eliminate holding costs by reducing inventory levels to near zero. With a just-in-time (JIT) inventory system, component parts arrive from suppliers just as they are needed at each stage of production. By having parts arrive “just in time,” the manufacturer has little inventory on hand and thus avoids the costs associated with holding inventory. For example, by combining a JIT inventory system with its make-to-order production system, Dell, Inc. turns its inventory more than 500 times a year, as mentioned above. John Egan, who heads Dell’s inventory fulfillment center in Austin, Texas, said this about Dell’s JIT inventory system: “We used to measure our factory inventory in days; but now we manage it in hours. Our suppliers see demand changes every two hours. We try to achieve a perfect balance between [the] parts [that are] needed and what’s [already] here [in the factory].”79 To have just the right amount of inventory arrive at just the right time requires a tremendous amount of coordination between manufacturing operations and suppliers. One way to promote tight coordination under JIT is close proximity. Most parts suppliers for Toyota’s JIT system at its Georgetown, Kentucky plant are located within 200 miles of the plant. Furthermore, parts are picked up from suppliers and delivered to Toyota as often as 16 times a day.80 A second way to promote close coordination under JIT is to have a shared information system that allows a manufacturer and its suppliers to know the quantity and kinds of parts inventory the other has in stock. Generally, factories and suppliers facilitate information sharing by using the same part numbers and names. Ford’s seat supplier accomplishes this by sticking a bar code on each seat, which Ford then uses to route the seat through its factory.
just-in-time (JIT) inventory system An inventory system in which component parts arrive from suppliers just as they are needed at each stage of production.
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kanban A ticket-based JIT system that indicates when to reorder inventory.
materials requirement planning (MRP) A production and inventory system that determines the production schedule, production batch sizes, and inventory needed to complete final products.
independent demand system An inventory system in which the level of one kind of inventory does not depend on another.
dependent demand system An inventory system in which the level of inventory depends on the number of finished units to be produced.
Manufacturing operations and their parts suppliers can also facilitate close coordination by using the Japanese system of kanban. Kanban, which is Japanese for “sign,” is a simple ticket-based system that indicates when it is time to reorder inventory. Suppliers attach kanban cards to batches of parts. Then, when an assembly-line worker uses the first part out of a batch, the kanban card is removed. The cards are then collected, sorted, and quickly returned to the supplier, who begins resupplying the factory with parts that match the order information on the kanban cards. Glenn Uminger, manager of production control and logistics at Toyota’s Georgetown, Kentucky plant, says, “We are placing orders for new parts as the first part is used out of a box.” And, because prices and batch sizes are typically agreed to ahead of time, kanban tickets greatly reduce paperwork and ordering costs.81 A third method for managing inventory is materials requirement planning (MRP). MRP is a production and inventory system that, from beginning to end, precisely determines the production schedule, production batch sizes, and inventories needed to complete final products. The three key parts of MRP systems are the master production schedule, the bill of materials, and inventory records. The master production schedule is a detailed schedule that indicates the quantity of each item to be produced, the planned delivery dates for those items, and the time by which each step of the production process must be completed in order to meet those delivery dates. Based on the quantity and kind of products set forth in the master production schedule, the bill of materials identifies all the necessary parts and inventory, the quantity or volume of inventory to be ordered, and the order in which the parts and inventory should be assembled. Inventory records indicate the kind, quantity, and location of inventory that is on hand or that has been ordered. When inventory records are combined with the bill of materials, the resulting report indicates what to buy, when to buy it, and what it will cost to order. Today, nearly all MRP systems are available in the form of powerful, flexible computer software.82 Which inventory management system should you use? Economic order quantity (EOQ) formulas are intended for use with independent demand systems, in which the level of one kind of inventory does not depend on another. For example, because inventory levels for automobile tires are unrelated to the inventory levels of women’s dresses, Sears could use EOQ formulas to calculate separate optimal order quantities for dresses and tires. By contrast, JIT and MRP are used with dependent demand systems, in which the level of inventory depends on the number of finished units to be produced. For example, if Yamaha makes 1,000 motorcycles a day, then it will need 1,000 seats, 1,000 gas tanks, and 2,000 wheels and tires each day. So, when optimal inventory levels depend on the number of products to be produced, use a JIT or MRP management system.
Review 5: Inventory There are four kinds of inventory: raw materials, component parts, work-inprocess, and finished goods. Because companies incur ordering, setup, holding, and stockout costs when handling inventory, inventory costs can be enormous. To control those costs, companies measure and track inventory in three ways: average aggregate inventory, weeks of supply, and turnover. Companies meet the basic goals of inventory management (avoiding stockouts and reducing inventory without hurting daily operations) through economic order quantity (EOQ) formulas, just-in-time (JIT) inventory systems, and materials requirement planning (MRP). EOQ formulas minimize holding and ordering costs by determining how much and how often inventory should be ordered. By having parts arrive just when they are needed at each stage of production, JIT systems attempt to minimize inventory levels and holding costs. JIT systems often depend on proximity, shared information, and the Japanese system of kanban.
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MRP precisely determines the production schedule, production batch sizes, and the ordering of inventories needed to complete final products. The three key parts of MRP systems are the master production schedule, the bill of materials, and inventory records. Use EOQ formulas when inventory levels are independent, and use JIT and MRP when inventory levels are dependent on the number of products to be produced.
Key Terms assemble-to-order operation, 597 average aggregate inventory, 601 batch production, 599 component parts inventories, 600 continuous-flow production, 599 continuous improvement, 591 customer focus, 591 customer satisfaction, 591 dependent demand systems, 606 economic order quantity (EOQ), 605
finished goods inventories, 601 holding cost, 603 independent demand system, 606 inventory, 600
inventory turnover, 602 ISO 9000, 589 ISO 14000, 589 job shops, 599 just-in-time (JIT) inventory system, 605
kanban, 606 line-flow production, 599 make-to-order operation, 597 make-to-stock operation, 597 manufacturing flexibility, 598 materials requirement planning (MRP), 606 multifactor productivity, 584 operations management, 582
ordering cost, 603 partial productivity, 584 productivity, 582 project manufacturing, 599 quality, 586 raw material inventories, 600 service recovery, 595 setup cost, 603 stockout, 601 stockout costs, 604 teamwork, 592 total quality management (TQM), 591
variation, 592 work-in-process inventories, 600
Concept Check 1. What is productivity, and why does it matter? 2. Explain the difference between partial productivity and multifactor productivity. 3. How are quality-related characteristics different for products and services? 4. Compare ISO 9000 certification to the Baldrige National Quality Awards. 5. Discuss the elements of total quality management. 6. What role does the service-profit chain play in customer satisfaction and company profitability?
7. Describe two ways to categorize manufacturing operations. 8. What is inventory, and how is it typically measured? 9. Discuss the costs associated with maintaining inventories. 10. List and describe the systems organizations can use to manage their inventory. What factor determines which system should be implemented?
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Self-Assessment HOW TO HANDLE DISGRUNTLED CUSTOMERS How a company manages its customers is an important indicator of its future success. But managing customers can be as difficult as it is critical. For example, one customer may like to be greeted by an employee and immediately helped upon entering the store. Another
might find this approach a bit aggressive. What is your style? If you were responsible for interacting with customers, which approach would you use? The SelfAssessment Appendix contains a questionnaire about interacting with customers. Flip to page 625 to begin.
Management Decision MOVING TO A MAKE-TO-ORDER OPERATION You’ve never been so energized by a sales pitch in your entire career.83 Consultants from a highly reputable software developer have just given a presentation to your management team on how to integrate your supply chain, which is no mean feat. Your company, Nike, sells multiple variations of 120,000 products in four sales cycles throughout the year. Anything that can help you get this process under control is welcome. The only problem with the consultants’ presentation is their underlying assumption: Nike should move from a maketo-stock operation to a make-to-order operation. That is, the consultant wants Nike to only begin making shoes after a retailer sends in an order. In the $16 billion U.S. running shoe market, Nike commands a full 39 percent market share, much larger than that of any other athletic shoe company. Your closest competitor, Reebok, is at a significantly lower 14 percent. Nike grew to that stature by creating a supply chain for the fragmented running shoe market of the 1970s. Nike guaranteed delivery and an inflationproof discount in return for getting orders six months in advance. Retailers went along happily because runners typically didn’t care what the shoes looked like as long as they were technically advanced. Because Nike shoes functioned impeccably, they became the standard. After over two decades of astronomical growth, however, Nike is suffering from its own fragmentation. The company has 27 order management systems around the globe and uses tens of millions of product numbers (think number of models times available sizes). Even though the sales cycle is six months, the design and production cycle is nine months, so to meet sales deadlines, the company is building and holding a small fortune in inventory (think number of models times available sizes times cost per pair). Furthermore, today’s customers want style, not just technically sophisticated shoes, and style changes a lot faster now than it did in the 1970s.
Nike’s extensive inventory, which was previously a strength, is becoming a weakness, as the risks of finished inventories becoming outdated are increasing sharply. That’s why you welcomed the consultants’ initial recommendations to switch to make-to-order system. But you don’t want to rush headlong into such a major change based only on the recommendation of outside consultants. After all, they’re trying to sell you $400 million in software, and you have an $11 billion business on the line. Questions 1. What issues do you need to consider as you make this decision? If you are overwhelmed thinking of a mammoth company like Nike, keep in mind that companies much smaller than Nike wrestle with this basic operations dilemma as well. 2. Do you invest in the $400 million software and commit to changing your manufacturing process from a make-to-stock to a make-to-order operation? (At this point, you are only considering make-to-order processing for retailers. That is, Nike wouldn’t begin making shoes until a retailer, like FootLocker, actually ordered them.) Explain your rationale. 3. How would changing to make-to-order processing for retailers affect how Nike manages its inventory? Address all aspects of managing inventory. 4. The more you reflect on the sales proposal, the more you wonder why Nike would stop at maketo-order processing for retailers. Why not go all the way and do a make to order system for the consumer? Is that even feasible? Explain. 5. Think about the price of athletic shoes. If Nike began manufacturing customized products for consumers, how would you expect the changes in manufacturing operations, manufacturing flexibility, and inventory to affect the cost and final price of a pair of Nikes? Why?
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Management Team Decision RECOVERY PLAN As you read in Chapter 5 (Planning and Decision Making), crisis management planning is an important component of business planning and corporate communication.84 Typically, when you hear “crisis management,” you think of a company responding to catastrophic publicity, but companies also need to think about managing smaller negative encounters because those encounters play a large role in customer retention. The retention rate for customers whose complaints or problems are resolved satisfactorily is 70 percent; when complaints are resolved quickly as well—typically on the spot—the retention rate soars to 95 percent. But when complaints are not resolved to the customer’s satisfaction, customer retention falls to 46 percent. And research shows that for major purchases (defined as being over $100), customers whose complaints are unresolved stay with the company only 19 percent of the time. So, companies should have a plan for responding to customers’ complaints and problems. Putting service recovery plans in place enables companies to respond quickly, the biggest factor in reversing the damage from negative customer experiences. In the spa industry, customer service and satisfaction are paramount. Not only do customers have high expectations for spa and salon services such as massage, skin treatments, nail treatments, and hair coloring and cutting, but spa service tabs can quickly surpass that $100 threshold defining major purchases. And what will upset a customer more than a horrendous haircut, botched fingernails, or blotchy skin? For this exercise, assemble four to five students to act as the management team for a local salon and day
spa that is getting ready to expand into several new neighborhoods by adding four local salons. Your salon has always had a high reputation for service, but as you expand, your experienced staff will be spread thin. In the next month, your team plans to hire and train 25 new cosmetologists and estheticians (skin care providers). To ensure that the new stores are successful, your team has decided to map out very clear service recovery procedures. After all, during the training periods and the first few months the new stores are open, mistakes are bound to happen. How you respond to them will mean the difference between a successful expansion and possible bankruptcy. Questions 1. As a team, brainstorm a list of service failures that could occur in a salon and day spa. (The examples of a bad haircut, damaged nails, and blotchy skin were mentioned above but there are many more possibilities.) Then, identify ways that you can resolve each problem on the list quickly and to the customer’s satisfaction. 2. There are bound to be situations that you haven’t planned for. How will you instruct your employees to handle unanticipated problems? 3. How can a complaint-response system be considered part of delivering quality service? 4. What kind of metric(s) can you create to measure the quality of your service delivery? Manufacturing companies typically measure things like on-time delivery, defects per million, production rate (how many pieces per hour), and so forth. What can a spa measure to keep its service operation in control?
Developing Your Career Potential TAKE A FACTORY TOUR Imagine that you arrive back at your dorm room one afternoon to find your roommate watching a Mister Rogers rerun. When asked why, your roommate replies, “Management homework.” That may not be as crazy as it sounds. Fred Rogers may well hold the record for factory tours. During his long career, he broadcast footage to millions of children showing how Cheerios,
plastic drinking straws, raincoats, pasta, blue jeans, spoons, and a host of other products are made. He was even at Crayola when the one-billionth crayon rolled off the production line. (He also broadcast footage of how Crayola crayons are made and packaged.) Today, John Ratzenberger (best known for his role as Cliff Claven on Cheers and the voice of the piggy bank in Toy Story, among other things) hosts a cable
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television program titled Made in America that features nothing but factory tours around the United States. The Food Network also broadcasts a program that describes how all kinds of food products are manufactured. Beyond the world of television, however, each year thousands of people visit corporate facilities like these: •
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•
•
•
•
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The Boeing Everett Tour Center outside Seattle introduces visitors to how Boeing makes its 747, 767, and 777 passenger jets. Steinway & Sons in Queens, New York, offers a two-and-a-half-hour tour that is like a master class. Each Steinway piano takes about a year to build, so you will be able to see pianos at every stage of the production process. Ben & Jerry’s in Waterbury, Vermont, offers tours accompanied with a scoop of whatever flavor ice cream was made that day. Tabasco Factory on Avery Island, Louisiana, is part factory tour, part nature preserve. You can see how the pepper sauce is aged in oak barrels and then step outside to see Bird City, a special structure devised by E. A. McIlhenny to provide a sanctuary for snowy egrets. Mack Truck has an assembly plant in Macungie, Pennsylvania. The production line is a a mile and a half long, so wear comfortable shoes! Yuengling Brewery (which you read about at the beginning of Chapter 5) in Pottsville, Pennsylvania, also offers tours, which include a trip to the cave where the nation’s oldest brewery used to age its beer. Louisville Slugger in Louisville, Kentucky (where else?), offers a factory tour at the end of which you receive a miniature Slugger bat to take home. Harley-Davidson plants in Milwaukee, Kansas City, and York, Pennsylvania, offer factory tours for teens and adults.
•
Carousel Magic in Mansfield, Ohio, is one of the few remaining carousel horse manufacturers and restorers.
Many companies no longer open their factories for tours. Kellogg’s in Battle Creek, Michigan, ceased giving factory tours in 1986, but now the company operates a museum/activity center called Cereal City. Other companies say they offer factory tours, but in reality the tour is just a marketing device. Budweiser in St. Louis has an enormous visitor center for its tours, but you won’t be able to see any of the actual production—just videos and the various outbuildings on the AnheuserBusch campus. Still other companies offer virtual tours of their operations. Just Born, maker of Marshmallow Peeps, Mike & Ikes, and Hot Tamales, offers a static tour of the Peep production line at http://www. marshmallowpeep.com. Hershey Foods also has an online tour at http://www.hersheys.com/kidztown/ factorytour.shtml.85 Your assignment is to take a factory tour. Use the Web or other resources to locate a factory tour near you. The site http://www.factorytoursusa.com organizes tours by state, so locating something interesting is easy. Questions 1. What steps or procedures does the company take to ensure the quality of its products? 2. How does the company measure productivity, and how does its productivity compare to others in the industry? 3. Using the vocabulary from the chapter, describe the basic steps used to make the finished products in this factory. 4. What did you find most impressive about this company or its manufacturing processes? Based on what you read in the chapter, describe one thing the company could do differently to improve quality, increase productivity, or reduce inventory.
Take Two
Biz Flix Casino
Martin Scorsese’s lengthy, complex, and beautifully filmed Casino offers a close look at the gambling casinos of Las Vegas and their organized crime connections in the 1970s. It completes his trilogy that began with Mean Streets (1973) and continued with Goodfellas (1990).86 In Casino, ambition, greed, drugs, and sex ultimately destroy the mob’s gambling empire. The film includes strong performances by Robert De Niro, Joe Pesci, and Sharon Stone. The violence and expletive-filled dialogue give Casino an R rating. This scene, which comes from the beginning of “The Truth about Las Vegas” sequence, opens the film and establishes important background about casino operations. Listen carefully to Sam Rothstein’s (De Niro) voice-over. He quickly describes the casino’s operation and explains how it tries to reach its goals. What to Watch for and Ask Yourself
1. What type of operations management does this scene show—manufacturing operations management or service operations management? 2. Are the customers directly involved in this operation? If they are, in what way? What likely effects does their involvement have on the casino’s operation and its management? 3. Does the casino have independent or interdependent demand systems?
Management Workplace Texas Nameplate
Winning the Baldrige Award is a tremendous feat. Texas Nameplate did it twice. Facing environmental cleanup lawsuits, razor-thin margins, and the likely loss of a key account, Dale Crownover figured his company had nothing to lose by trying to win the National Quality Award. The simple act of applying for the award started Texas Nameplate down a path to profitability unprecedented in the company’s history. What to Watch for and Ask Yourself
1. What effect has improved quality had on Texas Nameplate? 2. Describe how Texas Nameplate uses total quality management. 3. What kind of manufacturing operation is Texas Nameplate?
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self-assessment appendix Chapter 1 As you learned in Chapter 1, many managers begin their careers in management with specific notions about what it means to be the boss. This assessment is meant to establish your baseline interests in the skills covered in the chapter. It will not tell you whether you should or should not be a manager, nor whether you have “what it takes” to be a manager. It will, however, give you feedback on whether you are interested in the kinds of things that managers do in their jobs. Be candid as you complete the assessment by circling the appropriate responses.1 ML = Most like me SL = Somewhat like me NS = Not sure SU = Somewhat unlike me MU = Most unlike me 1. I can get others to do what I want them to do.
ML SL NS
SU MU
2. I frequently evaluate my job performance.
ML SL NS
SU MU
3. I prefer not to get involved in office politics.
ML SL NS
SU MU
4. I like the freedom that open-ended goals provide me.
ML SL NS
SU MU
5. I work best when things are orderly and calm.
ML SL NS
SU MU
6. I enjoy making oral presentations to groups of people.
ML SL NS
SU MU
7. I am confident in my abilities to accomplish difficult tasks.
ML SL NS
SU MU
8. I do not like to write.
ML SL NS
SU MU
9. I like solving difficult puzzles.
ML SL NS
SU MU
10. I am an organized person.
ML SL NS
SU MU
11. I have difficulty telling others they made a mistake.
ML SL NS
SU MU
12. I like to work set hours each day.
ML SL NS
SU MU
13. I view paperwork as a trivial task.
ML SL NS
SU MU
14. I like to help others learn new things.
ML SL NS
SU MU
15. I prefer to work alone.
ML SL NS
SU MU
16. I believe it is who you know, not what you know, that counts.
ML SL NS
SU MU
17. I enjoy doing several things at once.
ML SL NS
SU MU
18. I am good at managing money.
ML SL NS
SU MU
19. I would rather back down from an argument than let it get out of hand.
ML SL NS
SU MU
20. I am computer literate.
ML SL NS
SU MU
Scoring Start by reversing your scores for items 5, 8, 11, 15, and 16. For example, if you used ML, change it to MU, and vice versa; if you used SL, change it to SU, and vice versa. Now assign each answer a point value. 613
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Appendix
Number of ML answers
times 5 points each =
Number of SL answers
times 4 points each =
Number of NS answers
times 3 points each =
Number of SU answers
times 2 points each =
Number of MU answers
times 1 points each = TOTAL =
You can find the interpretation for your score on Xtra! at http://1pass.thomson.com.
Chapter 2
This inventory can be broken down into 5 sections:
If you are completing this assessment after reading Chapter 2, you know that Mary Parker Follett advanced several management theories that are now the underpinnings of the human resources field.2 As was suggested at the end of Chapter 2, you can use this assessment as a precursor to doing the Management Team Decision on page 65, which will help you—and your team—be more effective. Rate each question according to a scale where 1 = not at all, and 5 = very much.
(A) Add together your scores for items 1, 6, 11, and 16: (C) Add together your scores for items 2, 7, 12, and 17: (B) Add together your scores for items 3, 8, 13, and 18: (D) Add together your scores for items 4, 9, 14, and 19: (E) Add together your scores for items 5, 10, 15, and 20: You can find the interpretation for your score on Xtra! at http://1pass.thomson.com.
When I have a conflict at work, I do the following: 1. I give in to the wishes of the other party. 2. I try to realize a middle-of-the-road solution. 3. I push my own point of view. 4. I examine issues until I find a solution that really satisfies me and the other party. 5. I avoid a confrontation about our differences. 6. I concur with the other party. 7. I emphasize that we have to find a compromise solution. 8. I search for gains. 9. I stand for my own and other’s goals and interests. 10. I avoid differences of opinion as much as possible. 11. I try to accommodate the other party. 12. I insist we both give in a little. 13. I fight for a good outcome for myself. 14. I examine ideas from both sides to find a mutually optimal solution. 15. I try to make differences loom less severe. 16. I adapt to the other parties’ goals and interests. 17. I strive whenever possible towards a fifty-fifty compromise. 18. I do everything to win. 19. I work out a solution that serves my own as well as other’s interests as much as possible. 20. I try to avoid a confrontation with the other person.
Chapter 3 Complete the following questionnaire to get a sense of your tolerance for ambiguity.3 Indicate the extent to which you agree with the statements using the following scale: 1 2 3 4
Strongly disagree Moderately disagree Slightly disagree Neutral
5 Slightly agree 6 Moderately agree 7 Strongly agree
1. I don’t tolerate ambiguous situations well. 2. I find it difficult to respond when faced with an unexpected event. 3. I don’t think new situations are any more threatening than familiar situations. 4. I am drawn to situations which can be interpreted in more than one way. 5. I would rather avoid solving problems that must be viewed from several different perspectives. 6. I try to avoid situations which are ambiguous. 7. I am good at managing unpredictable situations. 8. I prefer familiar situations to new ones. 9. Problems which cannot be considered from just one point of view are a little threatening. 10. I avoid situations which are too complicated for me to easily understand. 11. I am tolerant of ambiguous situations. 12. I enjoy tackling problems which are complex enough to be ambiguous. 13. I try to avoid problems which don’t seem to have only one “best” solution.
Appendix
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14. I often find myself looking for something new, rather than trying to hold things constant in my life.
5. I’ve had fellow employees show me how to take things from where I work.
15. I generally prefer novelty over familiarity.
6. I will usually take someone up on a dare.
16. I dislike ambiguous situations.
7. I’ve always driven insured vehicles.
17. Some problems are so complex that just trying to understand them is fun.
8. If you were sent an extra item with an order, would you send it back?
18. I have little trouble coping with unexpected events.
9. Would you say everyone is a little dishonest?
19. I pursue problem situations which are so complex some people call them “mind-boggling.”
10. Most supervisors treat their employees fairly.
20. I find it hard to make a choice when the outcome is uncertain.
12. People say that I’m a workaholic.
21. I enjoy an occasional surprise. 22. I prefer a situation in which there is some ambiguity.
11. I worry about getting hurt at work.
13. I like to plan things carefully ahead of time. 14. Have you found a way a dishonest person in your job could take things from work? 15. I often act quickly without stopping to think things through.
Scoring Determine your score by entering your response to each survey item below, as follows. In blanks that say regular score, simply enter your response for that item. If your response was a 6, place a 6 in the regular score blank. In blanks that say reverse score, subtract your response from 8 and enter the result. So if your response was a 6, place a 2 (8 - 6 = 2) in the reverse score blank. Add up your total score.
16. It doesn’t bother me what other people think. 17. I have friends who are a little dishonest. 18. I am not a thrill seeker. 19. I have had my driver’s license revoked. 20. Are you too honest to steal?
1. regular score
12. reverse score
2. regular score
13. regular score
3. reverse score
14. reverse score
22. Do most employees get along well with their supervisors?
4. reverse score
15. reverse score
23. I’m lucky to avoid having accidents.
5. regular score
16. regular score
24. I always finish what I start.
6. regular score
17. reverse score
7. reverse score
18. reverse score
25. I make sure everything is in its place before leaving home.
8. regular score
19. reverse score
Scoring
9. regular score
20. regular score
10. regular score
21. reverse score
11. regular score
22. reverse score
Determine your average score for each category by entering your response to each survey item below, as follows. In blanks that say regular score, simply enter your response for that item. If your response was a 4, place a 4 in the regular score blank. In blanks that say reverse score, subtract your response from 6 and enter the result. So if your response was a 4, place a 2 (6 - 4 = 2) in the reverse score blank. Total your scores then compute your average score for each section.
TOTAL = You can find the interpretation for your score on Xtra! at http://1pass.thomson.com.
Antisocial Behavior:
Chapter 4 Answer each of the questions using the following scale: 4 1 Strongly agree 2 Agree 3 Not sure
21. Do most employees take small items from work?
4 Disagree 5 Strongly disagree
1. regular score
14. regular score
2. regular score
15. regular score
3. regular score
16. regular score
4. regular score
17. regular score
1. Did you ever think about taking money from where you worked, but didn’t go through with it?
5. regular score
18. reverse score
2. Have you ever borrowed something from work without telling anyone?
6. regular score
19. regular score
7. reverse score
20. reverse score
3. There are times I’ve been provoked into a fist fight. 4. Is it okay to get around the law if you don’t break it?
8. reverse score TOTAL =
÷ 15 =
(your average for Antisocial Behavior)
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Appendix
Orderliness/Diligence: 12. regular score
24. regular score
13. regular score
25. regular score
TOTAL =
÷4=
(your average for Orderliness/diligence)
Positive Outlook:
21. I generally try to find a place to work where I’ll be free from interruptions. 22. I’m pretty disorganized. 23. The goals I set are quite specific. 24. Distractions often interfere with my performance.
9. reverse score
21. reverse score
25. I sometimes give myself a treat if I’ve done something well.
10. regular score
22. regular score
26. I am able to focus on positive aspects of my activities.
11. reverse score
23. regular score
27. I use notes or other prompts to remind myself of schedules and deadlines.
TOTAL =
÷6=
(your average for Positive Outlook) You can find the interpretation for your scores on Xtra! at http://1pass.thomson.com.
Chapter 5 A part of planning, and therefore, management, is setting goals and tracking progress toward goal achievement.5 Answer each of the questions using the following scale: 1 Strongly disagree 2 Disagree 3 Not sure
4 Agree 5 Strongly Agree
1. I regularly set goals for myself.
28. I seem to waste a lot of time. 29. I use a day planner or other aids to keep track of schedules and deadlines. 30. I often think about how I can improve my performance. 31. I tend to lose track of the goals I’ve set for myself. 32. I tend to set difficult goals for myself. 33. I plan things for weeks in advance. 34. I try to make a visible commitment to my goals. 35. I set aside blocks of time for important activities.
2. I keep track of how well I’ve been doing. 3. I generally keep the resolutions that I make. 4. I often seek feedback about my performance. 5. I am able to focus on positive aspects of my work. 6. I’ll sometimes deny myself something until I’ve set my goals. 7. I use a to-do list to plan my activities.
Scoring Determine your score by entering your response to each survey item below, as follows. In blanks that say regular score, simply enter your response for that item. If your response was a 4, place a 4 in the regular score blank. In blanks that say reverse score, subtract your response from 6 and enter the result. So if your response was a 4, place a 2 (6 - 4 = 2) in the reverse score blank. Add up your total score.
8. I have trouble working without supervision.
1. regular score
17. reverse score
9. When I set my mind on some goal, I persevere until it’s accomplished.
2. regular score
18. regular score
3. regular score
19. reverse score
4. regular score
20. reverse score
5. regular score
21. regular score
6. regular score
22. reverse score
7. regular score
23. regular score
8. reverse score
24. reverse score
9. regular score
25. regular score
10. regular score
26. regular score
17. Unless someone pushes me a bit, I have trouble getting motivated.
11. regular score
27. regular score
12. regular score
28. reverse score
18. I reward myself when I meet my goals.
13. regular score
29. regular score
19. I tend to dwell on unpleasant aspects of the things I need to do.
14. regular score
30. regular score
20. I tend to deal with life as it comes rather than to try to plan things.
15. regular score
31. reverse score
16. reverse score
32. regular score
10. I’m a self-starter. 11. I make lists of things I need to do. 12. I’m good at time management. 13. I’m usually confident that I can reach my goals. 14. I am careful about how I manage my time. 15. I always plan my day. 16. I often find I spend my time on trivial things and put off doing what’s really important.
Appendix
33. regular score
617
35. regular score
34. regular score TOTAL = You can find the interpretation for your score on Xtra! at http://1pass.thomson.com.
Chapter 6 This assessment will provide some baseline information on attitudes you might have that will relate to your management skills.6 Answer each of the questions either true or false. Try not to spend too much time on any one item, and be sure to answer all the questions. 1. I get satisfaction from competing with others. 2. It’s usually not important to me to be the best. 3. Competition destroys friendships.
5 Almost always true 4 Often true 3 Not applicable
2 Seldom true 1 Almost never true
1. I openly discuss with my supervisor how to get ahead. 2. I try new ideas and approaches to problems. 3. I take things or situations apart to find out how they work. 4. I welcome uncertainty and unusual circumstances related to my tasks. 5. I negotiate my salary openly with my supervisor. 6. I can be counted on to find a new use for existing methods or equipment. 7. Among my colleagues and coworkers, I will be the first or nearly the first to try out a new idea or method.
4. Games with no clear cut winners are boring.
8. I take the opportunity to translate communications from other departments for my work group.
5. I am a competitive individual.
9. I demonstrate originality.
6. I will do almost anything to avoid an argument. 7. I try to avoid competing with others. 8. I would like to be on a debating team. 9. I often remain quiet rather than risk hurting another person. 10. I find competitive situations unpleasant. 11. I try to avoid arguments. 12. In general, I will go along with the group rather than create conflict. 13. I don’t like competing against other people. 14. I don’t like games that are winner-take-all. 15. I dread competing against other people. 16. I enjoy competing against an opponent. 17. When I play a game, I like to keep score. 18. I often try to outperform others.
10. I will work on a problem that has caused others great difficulty. 11. I provide critical input toward a new solution. 12. I provide written evaluations of proposed ideas. 13. I develop contacts with experts outside my firm. 14. I use personal contacts to maneuver into choice work assignments. 15. I make time to pursue my own pet ideas or projects. 16. I set aside resources for the pursuit of a risky project. 17. I tolerate people who depart from organizational routine. 18. I speak out in staff meetings. 19. I work in teams to try to solve complex problems. 20. If my co-workers are asked, they will say I am a wit. = TOTAL
19. I like competition.
You can find an interpretation of your score on Xtra! at http://1pass.thomson.com.
20. I don’t enjoy challenging others even when I think they are wrong.
Chapter 8
To determine your score, count the number of responses marked “True” and enter it here . You can find an interpretation of your score on Xtra! at http://1pass.thomson.com.
Chapter 7 This assessment will provide some baseline information you can use as you develop your managerial skills.7 Indicate the extent to which each of the following statements is true of either your actual behavior or your intentions at work. That is, describe the way you are or the way you intend to be on the job. Use this scale for your responses:
This assessment has three parts: Step 1, Complete the questionnaire shown below; Step 2, Determine your score; Step 3, Develop a plan to increase your global managerial potential.8 Step 1: Use the six-point rating scale to complete the 32-question inventory shown below. Rating Scale 6 Strongly Agree 5 Agree 4 Mildly Agree
3 Mildly Disagree 2 Disagree 1 Strongly Disagree
1. Our country should have the right to prohibit certain racial and religious groups from entering it to live.
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Appendix
2. Immigrants should not be permitted to come into our country if they compete with our own workers.
24. A global police force ought to be the only group in the world allowed to have armaments.
3. It would set a dangerous precedent if every person in the world had equal rights that were guaranteed by an international charter.
25. It would be dangerous for us to guarantee by international agreement that every person in the world should have complete religious freedom.
4. All prices for exported food and manufactured goods should be set by an international trade committee.
26. Our country should permit the immigration of foreign peoples, even if it lowers our standard of living.
5. Our country is probably no better than many others.
27. All national governments ought to be abolished and replaced by one central world government.
6. Race prejudice may be a good thing for us because it keeps many undesirable foreigners from coming into this country. 7. It would be a mistake for us to encourage certain racial groups to become well educated because they might use their knowledge against us. 8. We should be willing to fight for our country without questioning whether it is right or wrong. 9. Foreigners are particularly obnoxious because of their religious beliefs. 10. Immigration should be controlled by a global organization rather than by each country on its own. 11. We ought to have a world government to guarantee the welfare of all nations irrespective of the rights of any one. 12. Our country should not cooperate in any global trade agreements that attempt to better world economic conditions at our expense. 13. It would be better to be a citizen of the world than of any particular country.
28. It would not be wise for us to agree that working conditions in all countries should be subject to international control. 29. Patriotism should be a primary aim of education so that our children will believe our country is the best in the world. 30. It would be a good idea if all the races were to intermarry until there was only one race in the world. 31. We should teach our children to uphold the welfare of all people everywhere, even though it may be against the best interests of our own country. 32. War should never be justifiable, even if it is the only way to protect our national rights and honor. Step 2: Determine your score by entering your response to each survey item below, as follows. In blanks that say regular score, simply enter your response for that item. If your response was a 4, place a 4 in the regular score blank. In blanks that say reverse score, subtract your response from 7 and enter the result. So if your response was a 4, place a 3 (7 - 4 = 3) in the reverse score blank.
14. Our responsibility to people of other races ought to be as great as our responsibility to people of our own race.
1. reverse score
17. reverse score
2. reverse score
18. regular score
15. A global committee on education should have full control over what is taught in all countries about history and politics.
3. reverse score
19. reverse score
4. regular score
20. regular score
5. regular score
21. reverse score
16. Our country should refuse to cooperate in a total disarmament program even if some other nations agree to it.
6. reverse score
22. reverse score
17. It would be dangerous for our country to make international agreements with nations whose religious beliefs are antagonistic to ours.
7. reverse score
23. regular score
8. reverse score
24. regular score
18. Any healthy individual, regardless of race or religion, should be allowed to live wherever he or she wants to in the world. 19. Our country should not participate in any global organization that requires that we give up any of our national rights or freedom of action. 20. If necessary, we ought to be willing to lower our standard of living to cooperate with other countries in getting an equal standard for every person in the world. 21. We should strive for loyalty to our country before we can afford to consider world brotherhood. 22. Some races ought to be considered naturally less intelligent than ours. 23. Our schools should teach the history of the whole world rather than of our own country.
9. reverse score
25. reverse score
10. regular score
26. regular score
11. regular score
27. regular score
12. reverse score
28. reverse score
13. regular score
29. reverse score
14. regular score
30. regular score
15. regular score
31. regular score
16. reverse score
32. regular score
Total your scores from items 1-16 Total your scores from items 17-32 Add together to compute TOTAL = You can find an interpretation of your score on Xtra! at http://1pass.thomson.com.
Appendix
619
Chapter 9 Every organization needs some degree of flexibility to adapt to new situations, and some degree of standardization to make routine tasks and decisions as efficient and effective as possible.9 In this assessment, indicate the extent to which you agree or disagree with the following statements. Use this scale for your responses: 7 Strongly agree 6 Agree 5 Slightly agree 4 Neutral
3 Slightly disagree 2 Disagree 1 Strongly disagree
1. If a written rule does not cover some situation, we make up informal rules for doing things as we go along. 2. I feel that I am my own boss in most matters. 3. There are many things in my business that are not covered by some formal procedure. 4. A person can make his or her own decisions without checking with somebody else.
You can see where you fall on the formality continuum and find the interpretation of your score on Xtra! at http://1pass. thomson.com.
Chapter 10 The following 20-question survey assesses your thoughts about working in teams.10 Indicate the extent to which you agree with each of the following statements. Try not to spend too much time on any one item, and be sure to answer all the questions. Use this scale for your responses: 7 Strongly agree 6 Agree 5 Slightly agree 4 Neutral
3 Slightly disagree 2 Disagree 1 Strongly disagree
1. Only those who depend on themselves get ahead in life. 2. To be superior, a person must stand alone. 3. If you want something done right, you’ve got to do it yourself. 4. What happens to me is my own doing.
5. Usually, my contact with my company and its representatives involves doing things “by the rule book.”
5. In the long run, the only person you can count on is yourself.
6. How things are done here is left up to the person doing the work.
6. Winning is everything.
7. Contacts with my company and its representatives are on a formal, preplanned basis. 8. People here are allowed to do almost anything as they please. 9. I ignore the rules and reach informal agreements to handle some situations. 10. Most people here make their own rules on the job. 11. When rules and procedures exist in my company, they are usually written agreements. 12. The employees are constantly being checked on for rule violations. 13. People here feel as though they are constantly being watched, to see that they obey all the rules.
Scoring Determine your score by entering your response to each survey item below, as follows. In blanks that say regular score, simply enter your response for that item. If your response was a 6, place a 6 in the regular score blank. In blanks that say reverse score, subtract your response from 8 and enter the result. So if your response was a 6, place a 2 (8 - 6 = 2) in the reverse score blank. 1. reverse score
4. reverse score
2. reverse score
5. regular score
3. reverse score
6. reverse score
7. regular score
11. regular score
8. reverse score
12. regular score
9. reverse score
13. regular score
10. reverse score Add together to compute your TOTAL
.
7. I feel that winning is important in both work and games. 8. Success is the most important thing in life. 9. It annoys me when other people perform better than I do. 10. Doing your best isn’t enough; it is important to win. 11. I prefer to work with others in a group rather than working alone. 12. Given the choice, I would rather do a job where I can work alone rather than doing a job where I have to work with others in a group. 13. Working with a group is better than working alone. 14. People should be made aware that if they are going to be part of a group, then they are sometimes going to have to do things they don’t want to do. 15. People who belong to a group should realize that they’re not always going to get what they personally want. 16. People in a group should realize that they sometimes are going to have to make sacrifices for the sake of the group as a whole. 17. People in a group should be willing to make sacrifices for the sake of the group’s well-being. 18. A group is more productive when its members do what they want to do rather than what the group wants them to do. 19. A group is most efficient when its members do what they think is best rather than doing what the group wants them to do. 20. A group is more productive when its members follow their own interests and desires.
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Appendix
Scoring Determine your score by entering your response to each survey item below, as follows. In blanks that say regular score, simply enter your response for that item. If your response was a 3, place a 3 in the regular score blank. In blanks that say reverse score, subtract your response from 8 and enter the result. So if your response was a 3, place a 5 (8 - 3 = 5) in the reverse score blank..
12. In job interviews, I worry that the interviewer will focus on what I consider to be my least attractive physical features. 13. I get afraid about what kind of personal impression I am making on job interviews. 14. I worry that my job interview performance will be lower than that of other applicants.
1. reverse score
11. regular score
2. reverse score
12. reverse score
15. It is hard for me to avoid fidgeting during a job interview.
3. reverse score
13. regular score
16. I feel that my verbal communication skills are strong.
4. reverse score
14. regular score
5. reverse score
15. regular score
17. If I do not look my absolute best in a job interview, I find it very hard to be relaxed.
6. reverse score
16. regular score
7. reverse score
17. regular score
8. reverse score
18. reverse score
9. reverse score
19. reverse score
10. reverse score
20. reverse score
18. During a job interview, I worry that my actions will not be considered socially appropriate. 19. During a job interview, I am so troubled by thoughts of failing that my performance is reduced. 20. Job interviews often make me perspire (e.g., sweaty palms and underarms).
Add together to compute your TOTAL
21. During job interviews, I find it hard to understand what the interviewer is asking me.
You can find the interpretation for your score on Xtra! at http://1pass.thomson.com.
22. I feel uneasy if my hair is not perfect when I walk into a job interview.
Chapter 11
23. I worry about whether job interviewers will like me as a person.
Complete the assessment below by indicating the extent to which you agree with each of the following statements.11 Try not to spend too much time on any one item, and be sure to answer all the questions. Use this scale for your responses: 5 Strongly agree 4 Agree 3 Neutral
2 Disagree 1 Strongly disagree
24. During a job interview, I worry about what will happen if I don’t get the job. 25. My mouth gets very dry during job interviews. 26. I find it easy to communicate my personal accomplishments during a job interview. 27. During a job interview, I worry about whether I have dressed appropriately.
1. I become so apprehensive in job interviews that I am unable to express my thoughts clearly.
28. When meeting a job interviewer, I worry that my handshake will not be correct.
2. I often feel uneasy about my appearance when I am being interviewed for a job.
29. While taking a job interview, I worry about whether I am a good candidate for the job.
3. While taking a job interview, I become concerned that the interviewer will perceive me as socially awkward.
30. I often feel sick to my stomach when I am interviewed for a job.
4. In job interviews, I get very nervous about whether my performance is good enough.
TOTAL (Reverse your score on items 16 and 26. That is, if you wrote in a “5,” change it to a “1” and vice versa; if you wrote in a “4,” change it to a “2” and vice versa.)
5. During job interviews, my hands shake. 6. I get so anxious while taking job interviews that I have trouble answering questions that I know.
You can find the interpretation of your score on Xtra! at http://1pass.thomson.com.
7. Before a job interview I am so nervous that I spend an excessive amount of time on my appearance.
Chapter 12
8. I become very uptight about having to socially interact with a job interviewer.
Unlike the other assessments in this appendix, this one requires you to go online. Each Project Implicit test, which is also called an Implicit Association Test (IAT), takes about 10 minutes to complete. However, you’ll find it worthwhile to complete all of the different IATs. The researchers ask that you complete the initial surveys so that they can further enrich their data, but you needn’t worry about privacy issues. They are only interested in the raw data and not in who actually contributed it.
9. I am overwhelmed by thoughts of doing poorly when I am in job interview situations. 10. My heartbeat is faster than usual during job interviews. 11. During job interviews, I often can’t think of a thing to say.
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1. To begin, go to https://implicit.harvard.edu and click on “Demonstration.” 2. You will then be given a brief description of the project and prompted to “Go to the demonstration tests.” Click on that hot link. 3. The front page of the demonstration tests is a more detailed synopsis of the project and a disclaimer. Read the information and then click on “I wish to proceed.” 4. You will then reach the list of all the tests: age, gender-science, race, presidents, sexuality, gender-career, Arab-Muslim, weight, religion, disability, Native, Asian, weapons, and skin-tone. The tests most closely related to Chapter 12’s content on diversity are age, race, sexuality, gender-career, weight, disability, Native, Asian, and skin-tone. Each time you complete an IAT, return to the list to select the next relevant test for this course. We’ll use the age IAT as the basis for these instructions. Once you get the hang of it, you will be able to move through the preliminaries on any of IATs. To begin, click on “Age IAT.” 5. You will be directed to a page of technical information related to your computer settings. If you can see the green check mark, then click to begin. At the next page, click on “Continue.” 6. A survey of general information will pop up. The survey for each IAT is slightly different, except for the main demographic information at the bottom (age, race, etc.). Once you complete the survey, click on “Proceed.” 7. Read the instructions carefully. In essence, each time a certain word or image appears, you will need to either respond by typing an “e” or an “i.” The words used are purposely set to be obviously good or bad. For example, few people would dispute that evil goes in the category labeled “bad,” and love goes in the category labeled “good.” Don’t get caught up in semantics; just classify the terms as they are understood in the common language. 8. The test will ask you to classify the words and images several times, switching the words and images from the left hand to the right hand. That way, your right hand isn’t always typing an “i” for good and your left an “e” for bad. Pay attention to the changes. 9. Once you have finished the IAT on a particular topic, you will receive a results page. Check with your professor if he or she wants you to print it out or keep track of results in any way. Your instructor may want to average class results. After completing the IATs, think about your results. Do any surprise you, or were you aware that you were making the unconscious associations the software identified?
Chapter 13
Strongly agree Agree Slightly agree Neutral
3. My boss encourages people to make suggestions. 4. I can count on my co-workers to give me a hand when I need it. 5. I always get the feeling of learning new things from my work. 6. I often think about how to improve my job performance. 7. My pay is adequate to provide for the basic things in life. 8. The benefit program here gives nearly all the security I want. 9. My boss takes account of my wishes and desires. 10. My co-workers will speak out in my favor if justified. 11. My job requires that a person use a wide range of abilities. 12. I will actively try to improve my job performance in the future. 13. Considering the work required, the pay is what it should be. 14. Compared to other places, our benefits are excellent. 15. My boss keeps me informed about what is happening in the company. 16. I can tell my co-workers how I honestly feel. 17. My job requires making one (or more) important decision(s) every day. 18. I intend to do a lot more at work in the future. 19. Compared to the rates for similar work, here, my pay is good. 20. The benefit program here is adequate. 21. My boss lets me know when I could improve my performance. 22. My co-workers welcome opinions different from their own. 23. I have the opportunity to do challenging things at work. 24. I will probably do my best to perform well on the job in the future.
Scoring
Not everyone needs or wants the same things from their jobs.12 Indicate the extent to which you agree with each of the following statements. Try not to spend too much time on any one item, and be sure to answer all the questions. Use this scale for your responses: 7 6 5 4
2. Our benefits cover many of the areas they should.
3 Slightly disagree 2 Disagree 1 Strongly disagree
1. I get enough money from my job to live comfortably.
(A) Add together your scores for items 1, 2, 7, 8, 13, 14, 19, and 20: (B) Add together your scores for items 3, 4, 9, 10, 15, 16, 21, and 22: (C) Add together your scores for items 5, 6, 11, 12, 17, 18, 23, and 24: You can find the interpretation of your score on Xtra! at http://1pass.thomson.com.
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Chapter 14
Quarrelsome
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Harmonious
Below is Fiedler’s least-preferred co-worker scale (LPC).13 To complete it, you need to think of the one person with whom you worked least well. In other words, the person with whom you accomplished the least or with whom you had the most difficulty getting the job done. Once you have that person in mind, think of how you would describe him or her to another person. The LPC scale uses 18 oppositional adjective pairs to help you build your description. For each pair, choose the number closest to the word which best describes your LPC.
Gloomy
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Scoring
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Determine your leadership style by totaling all the numbers you selected into a single sum. Your score will fall between 18 and 96.
Boring
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TOTAL =
You can find the interpretation of your score on Xtra! at http://1pass.thomson.com.
Chapter 15 The following items relate to listening style.14 Circle the appropriate responses. Please be candid. Almost always
Often
Sometimes
Seldom
Almost Never
1. I want to listen to what others have to say when they are talking.
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2. I do not listen at my capacity when others are talking.
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3. By listening, I can guess a speaker’s intent or purpose without being told.
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5. I keep control of my biases and attitudes when listening to others speak so that these factors won’t affect my interpretation of the message.
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10. I am aware of whether or not a speaker’s meaning of words and concepts is the same as mine. SUBTOTAL =
+
GRAND TOTAL = You can find the interpretation of your score on Xtra! at http://1pass.thomson.com.
+
+
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Chapter 16 As you complete this feedback inventory, be candid as you circle the appropriate responses.15 Extremely Untrue
Extremely True
1. It is important for me to obtain useful information about my performance.
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2. If I receive negative feedback, I would have a negative attitude towards myself, so I try to avoid criticism.
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3. I am not really worried about what people will think of me if I ask for feedback about my performance.
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6. Negative feedback doesn’t really lower my self worth, so I don’t go out of my way to avoid it.
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8. Seeking feedback from my supervisor (instructor) is one way to show that I want to improve my performance.
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10. Receiving negative feedback wouldn’t really change the way I feel about myself.
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12. I want people to know when I ask for feedback so I can show my responsible nature.
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13. I would like to receive more useful information about my performance.
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14. It’s hard to feel good about myself when I receive negative feedback.
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15. I don’t really worry about what others would think of me if I asked for feedback.
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16. I don’t really care if people hear the good feedback that is given to me.
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17. I’m not really concerned about whether I receive useful information about my performance.
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18. I don’t really worry about getting negative feedback because I still feel I am a person of worth.
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Extremely Untrue
Extremely True
24. I don’t care either way if people see me asking my supervisor (instructor) for feedback
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26. I worry about receiving feedback that is likely to be negative because it hurts to be criticized.
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Scoring Determine your average score for each category by entering your response to each survey item below, as follows. In blanks that say regular score, simply enter your response for that item. If your response was a 4, place a 4 in the regular score blank. In blanks that say reverse score, subtract your response from 7 and enter the result. So if your response was a 4, place a 3 (7 - 4 = 3) in the reverse score blank. Total your scores then compute each average score. Desire for Useful Information:
Ego Defense:
Defensive Impression Management:
Assertive Impression Management:
1. regular score
2. regular score
3. reverse score
4. regular score
5. regular score
6. reverse score
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TOTAL =
TOTAL =
TOTAL =
TOTAL =
You can find the interpretation of your score on Xtra! at http://1pass.thomson.com.
Chapter 17 How do you feel about using computers and technology?16 Be candid as you complete the assessment by circling the appropriate responses. Strongly disagree
Strongly agree
1. I hesitate to use a computer for fear of making mistakes that I cannot correct.
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Strongly disagree
Strongly agree
4. I am confident that I can learn computer skills.
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TOTAL =
Scoring 17 Reverse scores on even-numbered items. Reverse means, for instance, a 1 becomes a 5; a 4 becomes a 2, etc. Using the reversed scores and the remaining scores, compute your score for the 19 items by adding up the scores. You can find the interpretation of your score on Xtra! at http://1pass.thomson.com.
Chapter 18 The following assessment will evaluate your perspectives on relationship a company has with its customers. Be candid as you respond to the questions using a scale from 1 to 9 in which 1 means you strongly disagree, 5 means you are neutral, and 9 means you strongly agree (other numbers indicate varying degrees of agreement or disagreement).18
4. It is necessary to stretch the truth in describing a product to a customer. 5. I decide what product/service to offer on the basis of what I can convince customers to accept, not on the basis of what will satisfy them in the long run. 6. I paint too rosy a picture of my product/service to make them sound as good as possible.
1. I try to bring a customer with a problem together with a product/service that helps solve that problem.
7. I try to find out what kind of products/services will be most helpful to a customer.
2. I keep alert for weaknesses in a customer's personality so I can use them to put pressure on them to agree with me.
8. I try to sell a customer all I can convince them to buy, even if I think it is more than a wise customer would buy.
3. I try to influence a customer by information rather than pressure.
9. I begin talking about the product/service before exploring a customer's need with him or her.
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10. I try to help a customer achieve their goals. 11. I try to figure out what a customer's needs are. 12. A good employee has to have the customer's best interest in mind. 13. I try to sell as much as I can rather than to satisfy a customer. 14. I try to give customers an accurate expectation of what our product/service will do for them. 15. I imply to a customer that something is beyond my control when it is not. 16. I try to achieve my goals by satisfying customers. 17. If I am not sure if our product/service is right for a customer, I will still apply pressure to get him or her to buy. 18. I answer a customer's question about product/services as correctly as I can. 19. I offer the product/service that is best suited to the customer's problem. 20. I treat a customer as a rival. 21. I spend more time trying to persuade a customer to buy than I do trying to discover his or her needs. 22. I am willing to disagree with a customer in order to help him or her make a better decision. 23. I try to get the customer to discuss their needs with me. 24. I pretend to agree with a customer to please them.
Scoring Determine your score by entering your response to each survey item below, as follows. Total each column to derive two scores. Customer Orientation
Selling Orientation
1. regular score
2. regular score
3. regular score
4. regular score
7. regular score
5. regular score
10. regular score
6. regular score
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9. regular score
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15. regular score
18. regular score
17. regular score
19. regular score
20. regular score
22. regular score
21. regular score
23. regular score
24. regular score
TOTAL =
TOTAL =
You can find the interpretation of your score on Xtra! at http://1pass.thomson.com.
1. P.L. Hunsaker, Management: A Skills Approach (Upper Saddle River, New Jersey: Pearson Prentice Hall, 2005) 24-25. 2. C.K.W. de Dreu, A. Evers, B. Beersma, E.S. Kluwer, and A. Nauta, “A Theory-Based Measure of Conflict Management Strategies in the Workplace,” Journal of Organizational Behavior, 22 (2001): 645-668. 3. D.L. McCain, “The MSTAT-I: A New Measure of an Individual’s Tolerance for Ambiguity,” Educational and Psychological Measurement, 53 (1993): 183-190. 4. J. E. Wanek, P.R. Sackett, & D.S. Ones, “Towards an Understanding of Integrity Test Similarities and Differences: An Item-Level Analysis of Seven Tests,” Personnel Psychology 56 (2003): 873-894. 5. R.J. Aldag & L. W. Kuzuhara, Mastering Management Skills: A Manager’s Toolkit (Mason, OH: Thomson South-Western, 2005) 172-173. 6. J.M. Houston & R.D. Smither, “The Nature of Competitiveness: The Development and Validation of the Competitiveness Index,” Educational and Psychological Measurement 52 (1992): 407-418. 7. J.E. Ettlie and R. D. O’Keefe, “Innovative Attitudes, Values, and Intentions in Organizations,” Journal of Management Studies 19 (1982): 163-182. 8. R. W. Boatler, “Study Abroad: Impact on Student Worldmindedness,” Journal of Teaching in International Business 2, no. 2 (1990): 13-17; R.W. Boatler, “Worldminded Attitude Change in a Study Abroad Program: Contact and Content Issues,” Journal of Teaching in International Business 3, no. 4 (1992): 59-68; H. Lancaster, “Learning to Manage in a Global Workplace (You’re on Your Own),” The Wall Street Journal, 2 June 1998, B1; D. L. Sampson & H. P. Smith, “A Scale to Measure Worldminded Attitudes,” Journal of Social Psychology 45 (1957): 99-106. 9. Bruner, James, Hensel, Marketing Scales Handbook, 931-934. 10. J.A. Wagner, “Studies of Individualism-Collectivism: Effects on Cooperation in Groups,” Academy of Management Journal 38, no. 1 (1995): 152-172. 11. J. McCarthy and R. Goffin, “Measuring Job Interview Anxiety: Beyond Weak Knees and Sweaty Palms,” Personnel Psychology 54, no. 3 (2004): 31. 12. C.A. Arnolds and C. Boshoff, “Compensation, Esteem Valence, and Job Performance: An Empirical Assessment of Alderfer’s ERG Theory,” International Journal of Human Resource Management 13, no. 4 (2002): 697-719. 13. F. E. Fiedler and M.M. Chemers, “Improving Leadership Effectiveness: The Leader Match Concept, (New York: John Wiley & Sons, 1984). 14. C.G. Pearce, I.W. Johnson, and R.T. Barker, “Assessment of the Listening Styles Inventory: Progress in Establishing Reliability and Validity,” Journal of Business and Technical Communication 17, no. 1 (2003): 84-113. 15. M. Tuckey, N. Brewer, P. Williamson, “The Influence of Motives and Goal Orientation on Feedback Seeking,” Journal of Occupational and Organizational Psychology 75, no. 2 (2002): 195. 16. M. D. Miller and R. K. Rainer, Jr., “Assessing and Improving the Dimensionality or the Computer Anxiety Rating Scale,” Educational and Psychological Measurement, August 1995, 652-657. 17. Heinssen, Jr., R., Glass, C., & Knight, L. “Assessing Computer Anxiety: Development and Validation of the Computer Anxiety Rating Scale,” Computers in Human Behavior (1987) 49-59. 18. J.A. Perriat, S. LeMay, S. Chakrabarty, “The Selling Orientation - Customer Orientation (SOCO) Scale: Cross-Validation of the Revised Version,” Journal of Personal Selling & Sales Management 24, no. 1 (2004): 49-54.
endnotes Chapter 1 1
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“Fact Sheet: Industry Statistics & Trends,” American Pet Products Manufacturers Association, Inc., 6 January 2005, http://www. appma.org/ press_industrytrends. asp; D. Barbera, “Ensuring Safety, Preventing Loss at Kozmo.com,” Access Control & Security Systems, 1 January2001, http://securitysolutions.com/mag/ security_ensuring_safety_prevent ing/; K. Booker, “Beautiful Dreamer,” Fortune, 18 December 2000, 234; R. Hof, “Amazon: ‘We’ve Never Said We Had to Do It All’ Jeff Bezos Has Been Forced to Scale Back His Ambitious Agenda,” BusinessWeek, 15 October 2001, 53; R. Hof & H. Greene, “How Amazon Cleared That Hurdle,” BusinessWeek, 4 February 2002, 60; A. Kessler, “No More New Economy Schadenfreude,” Wall Street Journal, 25 January 2002, A18; L. Lorek, “Amazon’s Poor Returns,” eWeek, 9 April 2001, http://www.eweek.com/article2/0, 1759,1242586,00.asp; F. Vogelstein, “Mighty Amazon,” Fortune, 26 May 2003, 60. K. Voigt, “Top Dogs,” Wall Street Journal, 15 March 2002, W1. A. Horowitz, M. Athitakis, M. Lesswell, & O. Thomas, “The 101 Dumbest Moments in Business,” Business 2.0, January–February 2003, 72. J. Sandberg, D. Solomon, & R. Blumenstein, “Inside WorldCom’s Unearthing of a Vast Accounting Scandal,” Wall Street Journal, 27 June 2002, A1; R. Blumenstein & J. Sandberg. “WorldCom CEO Quits Amid Probe of Firms’s Finances,” Wall Street Journal, 30 April 2002, A1. N. Byrnes & J. Merritt, “Professional Services: The Help Needs Help,” BusinessWeek, 13 January 2003, 129. T. Peters, “The Leadership Alliance” (Pat Carrigan excerpt), In Search of Excellence (Northbrook, IL: Video Arts distributor, 1985), videocassette. K. Hickey, “Faster, Better, More,” Traffic World, 6 October 2003, 24.
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K. Plate, “Anlayst Sees Cracks Growing in Home Depot’s Sales, Customer Service,” Denver Post, 12 January 2003. C. Terhune, “Retail Giant Aims to Spur Sales with Less-Cluttered Stores, Increased Customer Service,” Wall Street Journal, 8 March 2001, B1. D. A. Wren, A. G. Bedeian, & J. D. Breeze, “The Foundations of Henri Fayol’s Administrative Theory,” Management Decision 40 (2002): 906–918. H. Fayol, General and Industrial Management (London: Pittman & Sons, 1949). R. Stagner, “Corporate Decision Making,” Journal of Applied Psychology 53 (1969): 1–13. D. W. Bray, R. J. Campbell, & D. L. Grant, Formative Years in Business: A Long-Term AT&T Study of Managerial Lives (New York: Wiley, 1993). T. Archibald, “How Google Grows. . . and Grows. . . and Grows,” Fast Company, April 2003, 74. Ibid. K. Swisher, “Boom Town: Beneath Google’s Dot-Com Shell, a Serious Player,” Wall Street Journal, 21 January 2002, B1. R. J. Grisson, “Probability of the Superior Outcome of One Treatment over Another,” Journal of Applied Psychology 79 (1994): 314–316; J. E. Hunter & F. L. Schmidt, Methods of MetaAnalysis: Correcting Error and Bias in Research Findings (Beverly Hills, CA: Sage, 1990). P. Tam, “Palm Hopes Breaking in Two Will Juice Its Sluggish Sales,” Wall Street Journal, 28 October 2003, B1. B. Morris, “The Accidental CEO,” Fortune, 28 June 2003, 58. Ibid. “Xerox’s Chief Copies Good Practice, Not Past Mistakes,” Irish Times, 21 March 2003, 62. “Xerox’s 3Q Profits Jump on Product Sales,” eWeek, 21 October 2004. A. Warren, “The Small Stuff: It’s the Little Things That Add Up—and Often Annoy,” Wall Street Journal, 10 May 2004, R9.
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Companies: The List,” Beverage Industry, July 2001, 30. E. Gruber, “Cutting Time,” Modern Machine Shop, March 2001, 102. Bruce, “Heil ‘Automated Job Shop’ Produces Custom Trailers on Assembly Lines,” Trailer/Body Builders, http:// trailer-bodybuilders.com/mag/ trucks_heil_automated_job/, 3 July 2005. “Attack Submarines—SSN,” United States Navy Fact File, http://www.chinfo.navy.mil/nav palib/factfile/ships/ship-ssn.html, 3 July 2005. E. Eldridge, “Signs Indicate Auto Industry Needs Tune-up: Automakers Cut Production as Inventory Swells,” USA Today, 26 February 2001, 7B. N. Wingfield, “Out of Tune: iPod Shortage Rocks Apple,” Wall Street Journal, 16 December 2004, B1. Ibid. C. Marshall, “Linerboard: Market Recovery Will Continue; Price Hikes Predicted for 1998,” Pulp & Paper, 1 January 1998, 13. D. Drickhamer, “Reality Check,” Industry Week, November 2001, 29. D. Drickhamer, “Zeroing In on World-Class,” Industry Week, November 2001, 36. J. Zeiler, “The Need for Speed,” Operations & Fulfillment, 1 April 2004, 38. “About EFR,” Efficient Foodservice Response, http:// www.efr-central.com/ aboutefr.html, 3 July 2005. J. R. Henry, “Minimized Setup Will Make Your Packaging Line S.M.I.L.E.,” Packaging Technology & Engineering, 1 February 1998, 24.
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J. Donoghue, “The Future Is Now,” Air Transport World, 1 April 2001, 78. K. Clark, “An Eagle Eye for Inventory,” Chain Store Age, May 2005, Supplement, 8A. E. Powell, Jr., & F. Sahin, “Economic Production Lot Sizing with Periodic Costs and Overtime,” Decision Sciences 32 (2001): 423–452. J. Bonasia, “Just-in-Time Cuts Costs, but Has Risks,” Investor’s Business Daily, 3 October 2002, 4. N. Shirouzu, “Why Toyota Wins Such High Marks on Quality Surveys,” Wall Street Journal, 15 March 2001, A1. Ibid. G. Gruman, “Supply on Demand; Manufacturers Need to Know What’s Selling before They Can Produce and Deliver Their Wares in the Right Quantities,” Info World, 18 April 2005. C. Koch, “Nike Rebounds,” CIO, 15 June 2004, 57–62; J. Schlosser, “Just Do It,” Fortune, 13 December 2004, 25; T. Wilson, “Nike Just Doesn’t Do It,” Internet Week, 28 December 2001; S. Holmes, “Nike,” BusinessWeek, 24 November 2003, 98. R. A. Donnelley, Jr., “Managing the Moment of Truth for a Service Organization,” Supervision, December 2004, 3; M. De Paula, “Dispensing with the Data Dump to Achieve Customer Loyalty,” Banking Wire, 11 February 2005, 24. J. Craddock, ed., VideoHound’s Golden Movie Retriever (Farmington Hills, MI: The Gale Group, 2000).
Glossary A a-type conflict (affective conflict) disagreement that focuses on individuals or personal issues absolute comparisons a process in which each decision criterion is compared to a standard or ranked on its own merits accommodative strategy a social responsiveness strategy in which a company accepts responsibility for a problem and does all that society expects to solve that problem achievement-oriented leadership a leadership style in which the leader sets challenging goals, has high expectations of employees, and displays confidence that employees will assume responsibility and put forth extraordinary effort acquaintance time a cultural norm for how much time you must spend getting to know someone before the person is prepared to do business with you acquisition the purchase of a company by another company acquisition cost the cost of obtaining data that you don’t have action plan the specific steps, people, and resources needed to accomplish a goal active listening assuming half the responsibility for successful communication by actively giving the speaker nonjudgmental feedback that shows you’ve accurately heard what he or she said address terms cultural norms that establish whether you should address businesspeople by their first names, family names, or titles adverse impact unintentional discrimination that occurs when members of a particular race, gender, or ethnic group are unintentionally harmed or disadvantaged because they are hired, promoted, or trained (or any other employment decision) at substantially lower rates than others advocacy groups groups of concerned citizens who band together to try to influence the business practices of specific industries, businesses, and professions
affective cultures cultures in which people display emotions and feelings when communicating affectivity the stable tendency to experience positive or negative moods and to react to things in a generally positive or negative way affirmative action purposeful steps taken by an organization to create employment opportunities for minorities and women age discrimination treating people differently (e.g., in hiring and firing, promotion, and compensation decisions) because of their age agreeableness the degree to which someone is cooperative, polite, flexible, forgiving, good-natured, tolerant, and trusting analyzers an adaptive strategy that seeks to minimize risk and maximize profits by following or imitating the proven successes of prospectors appointment time a cultural norm for how punctual you must be when showing up for scheduled appointments or meetings Asia-Pacific Economic Cooperation (APEC) a regional trade agreement between Australia, Canada, Chile, the People’s Republic of China, Hong Kong, Japan, Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, the United States, and all the members of ASEAN, except Cambodia, Laos, and Myanmar assemble-to-order operation a manufacturing operation that divides manufacturing processes into separate parts or modules that are combined to create semicustomized products assessment centers a series of managerial simulations, graded by trained observers, that are used to determine applicants’ capability for managerial work Association of South East Nations (ASEAN) a regional trade agreement between Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam association or affinity patterns when two or more database elements tend to occur together in a significant way
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attack a competitive move designed to reduce a rival’s market share or profits attribution theory a theory that states that we all have a basic need to understand and explain the causes of other people’s behavior authentication making sure potential users are who they claim to be authoritarianism the extent to which an individual believes there should be power and status differences within organizations authority the right to give commands, take action, and make decisions to achieve organizational objectives authorization granting authenticated users approved access to data, software, and systems autonomy the degree to which a job gives workers the discretion, freedom, and independence to decide how and when to accomplish the job average aggregate inventory average overall inventory during a particular time period awareness training training that is designed to raise employees’ awareness of diversity issues and to challenge the underlying assumptions or stereotypes they may have about others
B BCG matrix a portfolio strategy, developed by the Boston Consulting Group, that categorizes a corporation’s businesses by growth rate and relative market share, and helps managers decide how to invest corporate funds background checks procedures used to verify the truthfulness and accuracy of information that applicants provide about themselves and to uncover negative, job-related background information not provided by applicants balance sheets accounting statements that provide a snapshot of a company’s financial position at a particular time balanced scorecard measurement of organizational performance in four equally important areas: finances, customers, internal operations, and innovation and learning bar code a visual pattern that represents numerical data by varying the thickness and pattern of vertical bars bargaining power of buyers a measure of the influence that customers have on a firm’s prices bargaining power of suppliers a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs batch production a manufacturing operation that produces goods in large batches in standard lot sizes behavior control the regulation of the behaviors and actions that workers perform on the job behavioral addition the process of having managers and employees perform new behaviors that are central to and symbolic of the new organizational culture that a company wants to create behavioral formality a workplace atmosphere characterized by routine and regimen, specific rules about how to behave, and impersonal detachment behavioral informality a workplace atmosphere characterized by spontaneity, casualness, and interpersonal familiarity behavioral observation scales (BOSs) rating scales that indicate the frequency with which workers perform specific behaviors that are representative of the job dimensions critical to successful job performance
Glossary
behavioral substitution the process of having managers and employees perform new behaviors central to the “new” organizational culture in place of behaviors that were central to the “old” organizational culture benchmarking the process of identifying outstanding practices, processes, and standards in other companies and adapting them to your company biographical data (biodata) extensive surveys that ask applicants questions about their personal backgrounds and life experiences biometrics identifying users by unique, measurable body features, such as fingerprint recognition or iris scanning blog a personal Web site that provides personal opinions or recommendations, news summaries, and reader comments bona fide occupational qualification (BFOQ) an exception in employment law that permits gender, age, religion, and the like to be used when making employment decisions, but only if they are “reasonably necessary to the normal operation of that particular business.” BFOQs are strictly monitored by the Equal Employment Opportunity Commission. bounded rationality a decision-making process restricted in the real world by limited resources, incomplete and imperfect information, and managers’ limited decision-making capabilities brainstorming a decision-making method in which group members build on each others’ ideas to generate as many alternative solutions as possible budgeting quantitative planning through which managers decide how to allocate available money to best accomplish company goals budgets quantitative plans through which managers decide how to allocate available money to best accomplish company goals bureaucracy the exercise of control on the basis of knowledge, expertise, or experience bureaucratic control the use of hierarchical authority to influence employee behavior by rewarding or punishing employees for compliance or noncompliance with organizational policies, rules, and procedures bureaucratic immunity the ability to make changes without first getting approval from managers or other parts of an organization business confidence indices indices that show managers’ level of confidence about future business growth buyer dependence the degree to which a supplier relies on a buyer because of the importance of that buyer to the supplier and the difficulty of finding other buyers for its products
C c-type conflict (cognitive conflict) disagreement that focuses on problem- and issue-related differences of opinion cafeteria benefit plans (flexible benefit plans) plans that allow employees to choose which benefits they receive, up to a certain dollar value cash cow a company with a large share of a slow-growing market
Glossary
cash flow analysis a type of analysis that predicts how changes in a business will affect its ability to take in more cash than it pays out Central America Free Trade Agreement (CAFTA) a regional trade agreement between Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States centralization of authority the location of most authority at the upper levels of the organization chain of command the vertical line of authority that clarifies who reports to whom throughout the organization change agent the person formally in charge of guiding a change effort change forces forces that produce differences in the form, quality, or condition of an organization over time change intervention the process used to get workers and managers to change their behavior and work practices character of the rivalry a measure of the intensity of competitive behavior between companies in an industry charismatic leadership the behavioral tendencies and personal characteristics of leaders that create an exceptionally strong relationship between them and their followers closed systems systems that can sustain themselves without interacting with their environments closure the tendency to fill in gaps of missing information by assuming that what we don’t know is consistent with what we already know coaching communicating with someone for the direct purpose of improving the person’s on-the-job performance or behavior coercion using formal power and authority to force others to change cognitive ability tests tests that measure the extent to which applicants have abilities in perceptual speed, verbal comprehension, numerical aptitude, general reasoning, and spatial aptitude cognitive maps graphic depictions of how managers believe environmental factors relate to possible organizational actions cohesiveness the extent to which team members are attracted to a team and motivated to remain in it commission a compensation system in which employees earn a percentage of each sale they make communication the process of transmitting information from one person or place to another communication cost the cost of transmitting information from one place to another communication medium the method used to deliver an oral or written message company hotlines phone numbers that anyone in the company can call anonymously to leave information for upper management company vision a company’s purpose or reason for existing compensation the financial and nonfinancial rewards that organizations give employees in exchange for their work competitive advantage providing greater value for customers than competitors can competitive analysis a process for monitoring the competition that involves identifying competition, anticipating their moves, and determining their strengths and weaknesses
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competitive inertia a reluctance to change strategies or competitive practices that have been successful in the past competitors companies in the same industry that sell similar products or services to customers complex environment an environment with many environmental factors complex matrix a form of matrix departmentalization in which managers in different parts of the matrix report to matrix managers, who help them sort out conflicts and problems component parts inventories the basic parts used in manufacturing that are fabricated from raw materials compression approach to innovation an approach to innovation that assumes that incremental innovation can be planned using a series of steps and that compressing those steps can speed innovation compromise an approach to dealing with conflict in which both parties deal with the conflict by giving up some of what they want in order to reach agreement on a plan to reduce or settle the conflict concentration of effect the total harm or benefit that an act produces on the average person conceptual skills the ability to see the organization as a whole, understand how the different parts affect each other, and recognize how the company fits into or is affected by its environment concertive control the regulation of workers’ behavior and decisions through work group values and beliefs concurrent control a mechanism for gathering information about performance deficiencies as they occur, thereby eliminating or shortening the delay between performance and feedback conduit metaphor the mistaken assumption that senders can pipe their intended messages directly into the heads of receivers with perfect clarity and without noise or perceptual filters interfering with the receivers’ understanding of the message conscientiousness the degree to which someone is organized, hardworking, responsible, persevering, thorough, and achievement oriented consideration the extent to which a leader is friendly, approachable, and supportive and shows concern for employees consistent organizational cultures when a company actively defines and teaches organizational values, beliefs, and attitudes constructive feedback feedback intended to be helpful, corrective, and/or encouraging contingency approach holds that there are no universal management theories and that the most effective management theory or idea depends on the kinds of problems or situations that managers are facing at a particular time and place contingency theory a leadership theory that states that in order to maximize work group performance, leaders must be matched to the situation that best fits their leadership style continuous-flow production a manufacturing operation that produces goods at a continuous, rather than a discrete, rate continuous improvement an organization’s ongoing commitment to constantly assess and improve the processes and procedures used to create products and services
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continuous reinforcement schedule a schedule that requires a consequence to be administered following every instance of a behavior control a regulatory process of establishing standards to achieve organizational goals, comparing actual performance against the standards, and taking corrective action, when necessary control loss the situation in which behavior and work procedures do not conform to standards controlling monitoring progress toward goal achievement and taking corrective action when needed conventional level of moral development the second level of moral development in which people make decisions that conform to societal expectations cooperative contract an agreement in which a foreign business owner pays a company a fee for the right to conduct that business in his or her country core capabilities the internal decision-making routines, problem-solving processes, and organizational cultures that determine how efficiently inputs can be turned into outputs core firms the central companies in a strategic group corporate portal a hybrid of executive information systems and intranets that allows managers and employees to use a Web browser to gain access to customized company information and to complete specialized transactions corporate talk shows televised company meetings that allow remote audiences (employees) to pose questions to the show’s host and guests corporate-level strategy the overall organizational strategy that addresses the question “What business or businesses are we in or should we be in?” cost leadership the positioning strategy of producing a product or service of acceptable quality at consistently lower production costs than competitors can, so that the firm can offer the product or service at the lowest price in the industry counseling communicating with someone about non-jobrelated issues that may be affecting or interfering with the person’s performance creative work environments workplace cultures in which workers perceive that new ideas are welcomed, valued, and encouraged creativity the production of novel and useful ideas cross-cultural communication transmitting information from a person in one country or culture to a person from another country or culture cross-functional team a team composed of employees from different functional areas of the organization cross training training team members to do all or most of the jobs performed by the other team members customer defections a performance assessment in which companies identify which customers are leaving and measure the rate at which they are leaving customer departmentalization organizing work and workers into separate units responsible for particular kinds of customers customer focus an organizational goal to concentrate on meeting customers’ needs at all levels of the organization
Glossary
customer satisfaction an organizational goal to provide products or services that meet or exceed customers’ expectations customs classification a classification assigned to imported products by government officials that affects the size of the tariff and imposition of import quotas cybernetic the process of steering or keeping on course cybernetic feasibility the extent to which it is possible to implement each step in the control process
D data clusters when three or more database elements occur together (i.e., cluster) in a significant way data encryption the transformation of data into complex, scrambled digital codes that can be unencrypted only by authorized users who possess unique decryption keys data mining the process of discovering unknown patterns and relationships in large amounts of data data warehouse stores huge amounts of data that have been prepared for data mining analysis by being cleaned of errors and redundancy decentralization the location of a significant amount of authority in the lower levels of the organization decision criteria the standards used to guide judgments and decisions decision making the process of choosing a solution from available alternatives decision support system (DSS) an information system that helps managers understand specific kinds of problems and potential solutions and analyze the impact of different decision options using “what if” scenarios decoding the process by which the receiver translates the written, verbal, or symbolic form of a message into an understood message deep-level diversity differences such as personality and attitudes that are communicated through verbal and nonverbal behaviors and are learned only through extended interaction with others defenders an adaptive strategy aimed at defending strategic positions by seeking moderate, steady growth and by offering a limited range of high-quality products and services to a well-defined set of customers defensive bias the tendency for people to perceive themselves as personally and situationally similar to someone who is having difficulty or trouble defensive strategy a social responsiveness strategy in which a company admits responsibility for a problem but does the least required to meet societal expectations de-forming a reversal of the forming stage, in which team members position themselves to control pieces of the team, avoid each other, and isolate themselves from team leaders delegation of authority the assignment of direct authority and responsibility to a subordinate to complete tasks for which the manager is normally responsible Delphi technique a decision-making method in which members of a panel of experts respond to questions and to each other until reaching agreement on an issue de-norming a reversal of the norming stage, in which team performance begins to decline as the size, scope, goal, or members of the team change
Glossary
departmentalization subdividing work and workers into separate organizational units responsible for completing particular tasks dependent demand system an inventory system in which the level of inventory depends on the number of finished units to be produced design competition competition between old and new technologies to establish a new technological standard or dominant design design iteration a cycle of repetition in which a company tests a prototype of a new product or service, improves on that design, and then builds and tests the improved prototype de-storming a reversal of the storming phase, in which the team’s comfort level decreases, team cohesion weakens, and angry emotions and conflict may flare destructive feedback feedback that disapproves without any intention of being helpful and almost always causes a negative or defensive reaction in the recipient devil’s advocacy a decision-making method in which an individual or a subgroup is assigned the role of a critic dialectical inquiry a decision-making method in which decision makers state the assumptions of a proposed solution (a thesis) and generate a solution that is the opposite (antithesis) of that solution differentiation the positioning strategy of providing a product or service that is sufficiently different from competitors’ offerings that customers are willing to pay a premium price for it direct competition the rivalry between two companies that offer similar products and services, acknowledge each other as rivals, and act and react to each other’s strategic actions direct foreign investment a method of investment in which a company builds a new business or buys an existing business in a foreign country directive leadership a leadership style in which the leader lets employees know precisely what is expected of them, gives them specific guidelines for performing tasks, schedules work, sets standards of performance, and makes sure that people follow standard rules and regulations disability a mental or physical impairment that substantially limits one or more major life activities disability discrimination treating people differently because of their disabilities discontinuous change the phase of a technology cycle characterized by technological substitution and design competition discretionary responsibilities the expectation that a company will voluntarily serve a social role beyond its economic, legal, and ethical responsibilities discussion time a cultural norm for how much time should be spent in discussion with others disparate treatment intentional discrimination that occurs when people are purposely not given the same hiring, promotion, or membership opportunities because of their race, color, gender, age, ethnic group, national origin, or religious beliefs disposition the tendency to respond to situations and events in a predetermined manner
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disseminator role the informational role managers play when they share information with others in their departments or companies distal goals long-term or primary goals distinctive competence what a company can make, do, or perform better than its competitors distributive justice the perceived degree to which outcomes and rewards are fairly distributed or allocated disturbance handler role the decisional role managers play when they respond to severe problems that demand immediate action diversification a strategy for reducing risk by buying a variety of items (stocks or, in the case of a corporation, types of businesses) so that the failure of one stock or one business does not doom the entire portfolio diversity a variety of demographic, cultural, and personal differences among an organization’s employees and customers diversity audits formal assessments that measure employee and management attitudes, investigate the extent to which people are advantaged or disadvantaged with respect to hiring and promotions, and review companies’ diversityrelated policies and procedures diversity pairing a mentoring program in which people of different cultural backgrounds, genders, or races/ethnicities are paired together to get to know each other and change stereotypical beliefs and attitudes dog a company with a small share of a slow-growing market dominant design a new technological design or process that becomes the accepted market standard domination an approach to dealing with conflict in which one party deals with the conflict by satisfying its desires and objectives at the expense of the other party’s desires and objectives downsizing the planned elimination of jobs in a company downward communication communication that flows from higher to lower levels in an organization dynamic environment an environment in which the rate of change is fast dysfunctional turnover loss of high-performing employees who voluntarily choose to leave a company
E early retirement incentive programs (ERIPs) programs that offer financial benefits to employees to encourage them to retire early economic order quantity (EOQ) a system of formulas that minimizes ordering and holding costs and helps determine how much and how often inventory should be ordered economic responsibility the expectation that a company will make a profit by producing a valued product or service economic value added (EVA) the amount by which company profits (revenues, minus expenses, minus taxes) exceed the cost of capital in a given year efficiency getting work done with a minimum of effort, expense, or waste effectiveness accomplishing tasks that help fulfill organizational objectives
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electronic brainstorming a decision-making method in which group members use computers to build on each others’ ideas and generate many alternative solutions electronic data interchange (EDI) when two companies convert their purchase and ordering information to a standardized format to enable the direct electronic transmission of that information from one company’s computer system to the other company’s computer system electronic scanner an electronic device that converts printed text and pictures into digital images emotional stability the degree to which someone is not angry, depressed, anxious, emotional, insecure, and excitable empathetic listening understanding the speaker’s perspective and personal frame of reference and giving feedback that conveys that understanding to the speaker employee involvement team team that provides advice or makes suggestions to management concerning specific issues employee separation the voluntary or involuntary loss of an employee employee shrinkage employee theft of company merchandise employee stock ownership plan (ESOP) a compensation system that awards employees shares of company stock in addition to their regular compensation employee turnover loss of employees who voluntarily choose to leave the company employment benefits a method of rewarding employees that includes virtually any kind of compensation other than wages or salaries employment references sources such as previous employers or coworkers who can provide job-related information about job candidates empowering workers permanently passing decision-making authority and responsibility from managers to workers by giving them the information and resources they need to make and carry out good decisions empowerment feelings of intrinsic motivation, in which workers perceive their work to have impact and meaning and perceive themselves to be competent and capable of self-determination encoding putting a message into a written, verbal, or symbolic form that can be recognized and understood by the receiver entrepreneur role the decisional role managers play when they adapt themselves, their subordinates, and their units to incremental change entrepreneurial orientation the set of processes, practices, and decision-making activities that lead to new entry, characterized by five dimensions: risk taking, autonomy, innovativeness, proactiveness, and competitive aggressiveness entrepreneurship the process of entering new or established markets with new goods or services entropy the inevitable and steady deterioration of a system environmental change the rate at which a company’s general and specific environments change environmental complexity the number of external factors in the environment that affect organizations environmental scanning searching the environment for important events or issues that might affect an organization equity theory a theory that states that people will be motivated when they perceive that they are being treated fairly ethical behavior behavior that conforms to a society’s accepted principles of right and wrong
Glossary
ethical charismatics charismatic leaders who provide developmental opportunities for followers, are open to positive and negative feedback, recognize others’ contributions, share information, and have moral standards that emphasize the larger interests of the group, organization, or society ethical intensity the degree of concern people have about an ethical issue ethical responsibility the expectation that a company will not violate accepted principles of right and wrong when conducting its business ethics the set of moral principles or values that defines right and wrong for a person or group evaluation apprehension fear of what others will think of your ideas executive information system (EIS) a data processing system that uses internal and external data sources to provide the information needed to monitor and analyze organizational performance expatriate someone who lives and works outside his or her native country expectancy the perceived relationship between effort and performance expectancy theory a theory that states that people will be motivated to the extent to which they believe that their efforts will lead to good performance, that good performance will be rewarded, and that they will be offered attractive rewards experiential approach to innovation an approach to innovation that assumes a highly uncertain environment and uses intuition, flexible options, and hands-on experience to reduce uncertainty and accelerate learning and understanding expert system an information system that contains the specialized knowledge and decision rules used by experts and experienced decision makers so that nonexperts can draw on this knowledge base to make decisions exporting selling domestically produced products to customers in foreign countries external environments all events outside a company that have the potential to influence or affect it external locus of control the belief that what happens to you is largely the result of factors beyond your control external recruiting the process of developing a pool of qualified job applicants from outside the company extinction reinforcement in which a positive consequence is no longer allowed to follow a previously reinforced behavior, thus weakening the behavior extranets networks that allow companies to exchange information and conduct transactions with outsiders by providing them direct, Web-based access to authorized parts of a company’s intranet or information system extraversion the degree to which someone is active, assertive, gregarious, sociable, talkative, and energized by others extrinsic reward a reward that is tangible, visible to others, and given to employees contingent on the performance of specific tasks or behaviors
F feedback the amount of information the job provides to workers about their work performance feedback control a mechanism for gathering information about performance deficiencies after they occur
Glossary
feedback to sender in the communication process, a return message to the sender that indicates the receiver’s understanding of the message feedforward control a mechanism for monitoring performance inputs rather than outputs to prevent or minimize performance deficiencies before they occur figurehead role the interpersonal role managers play when they perform ceremonial duties financial ratios calculations typically used to track a business’s liquidity (cash), efficiency, and profitability over time compared to other businesses in its industry finished goods inventories the final outputs of manufacturing operations firewall a protective hardware or software device that sits between the computers in an internal organizational network and outside networks, such as the Internet firm-level strategy a corporate strategy that addresses the question “How should we compete against a particular firm?” first-line managers managers who train and supervise the performance of nonmanagerial employees who are directly responsible for producing the company’s products or services first-mover advantage the strategic advantage that companies earn by being the first to use new information technology to substantially lower costs or to make a product or service different from that of competitors fixed interval reinforcement schedule an intermittent schedule in which consequences follow a behavior only after a fixed time has elapsed fixed ratio reinforcement schedule an intermittent schedule in which consequences are delivered following a specific number of behaviors flow a psychological state of effortlessness, in which you become completely absorbed in what you’re doing and time seems to pass quickly focus strategy the positioning strategy of using cost leadership or differentiation to produce a specialized product or service for a limited, specially targeted group of customers in a particular geographic region or market segment formal communication channel the system of official channels that carry organizationally approved messages and information forming the first stage of team development, in which team members meet each other, form initial impressions, and begin to establish team norms four-fifths (or 80 percent) rule a rule of thumb used by the courts and the EEOC to determine whether there is evidence of adverse impact. A violation of this rule occurs when the selection rate for a protected group is less than 80 percent or four-fifths of the selection rate for a nonprotected group. franchise a collection of networked firms in which the manufacturer or marketer of a product or service, the franchisor, licenses the entire business to another person or organization, the franchisee Free Trade Area of the Americas (FTAA) a regional trade agreement that, when signed, will create a regional trading zone encompassing 34 countries in North and South America
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functional departmentalization organizing work and workers into separate units responsible for particular business functions or areas of expertise functional turnover loss of poor-performing employees who voluntarily choose to leave a company fundamental attribution error the tendency to ignore external causes of behavior and to attribute other people’s actions to internal causes
G gainsharing a compensation system in which companies share the financial value of performance gains, such as productivity, cost savings, or quality, with their workers Gantt chart a graphical chart that shows which tasks must be completed at which times in order to complete a project or task gender discrimination treating people differently because of their gender General Agreement on Tariffs and Trade (GATT) a worldwide trade agreement that reduced and eliminated tariffs, limited government subsidies, and established protections for intellectual property General Electric workout a three-day meeting in which managers and employees from different levels and parts of an organization quickly generate and act on solutions to specific business problems general environment the economic, technological, sociocultural, and political trends that indirectly affect all organizations generational change change based on incremental improvements to a dominant technological design such that the improved technology is fully backward compatible with the older technology geographic departmentalization organizing work and workers into separate units responsible for doing business in particular geographic areas glass ceiling the invisible barrier that prevents women and minorities from advancing to the top jobs in organizations global business the buying and selling of goods and services by people from different countries global consistency when a multinational company has offices, manufacturing plants, and distribution facilities in different countries and runs them all using the same rules, guidelines, policies, and procedures global new ventures new companies that are founded with an active global strategy and have sales, employees, and financing in different countries goal a target, objective, or result that someone tries to accomplish goal acceptance the extent to which people consciously understand and agree to goals goal commitment the determination to achieve a goal goal difficulty the extent to which a goal is hard or challenging to accomplish goal-setting theory a theory that states that people will be motivated to the extent to which they accept specific, challenging goals and receive feedback that indicates their progress toward goal achievement goal specificity the extent to which goals are detailed, exact, and unambiguous
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government import standard a standard ostensibly established to protect the health and safety of citizens but, in reality, often used to restrict imports grand strategy a broad corporate-level strategic plan used to achieve strategic goals and guide the strategic alternatives that managers of individual businesses or subunits may use groupthink a barrier to good decision making caused by pressure within the group for members to agree with each other growth strategy a strategy that focuses on increasing profits, revenues, market share, or the number of places in which the company does business
H hearing the act or process of perceiving sounds holding cost the cost of keeping inventory until it is used or sold, including storage, insurance, taxes, obsolescence, and opportunity costs horizontal communication communication that flows among managers and workers who are at the same organizational level hostile work environment a form of sexual harassment in which unwelcome and demeaning sexually related behavior creates an intimidating and offensive work environment human resource information system (HRIS) a computerized system for gathering, analyzing, storing, and disseminating information related to the HRM process human resource management (HRM) the process of finding, developing, and keeping the right people to form a qualified work force human resource planning (HRP) using an organization’s goals and strategy to forecast the organization’s human resource needs in terms of attracting, developing, and keeping a qualified work force human skills the ability to work well with others
I ISO 9000 a series of five international standards, from ISO 9000 to ISO 9004, for achieving consistency in quality management and quality assurance in companies throughout the world ISO 14000 a series of international standards for managing, monitoring, and minimizing an organization’s harmful effects on the environment imperfectly imitable resources resources that are impossible or extremely costly or difficult for other firms to duplicate income statements accounting statements, also called “profit and loss statements,” that show what has happened to an organization’s income, expenses, and net profit over a period of time incremental change the phase of a technology cycle in which companies innovate by lowering costs and improving the functioning and performance of the dominant technological design independent demand system an inventory system in which the level of one kind of inventory does not depend on another individualism-collectivism the degree to which a person believes that people should be self-sufficient and that loyalty to one’s self is more important than loyalty to team or company
Glossary
industry regulation regulations and rules that govern the business practices and procedures of specific industries, businesses, and professions industry-level strategy a corporate strategy that addresses the question “How should we compete in this industry?” informal communication channel (“grapevine”) the transmission of messages from employee to employee outside of formal communication channels information useful data that can influence people’s choices and behavior initiating structure the degree to which a leader structures the roles of followers by setting goals, giving directions, setting deadlines, and assigning tasks innovation streams patterns of innovation over time that can create sustainable competitive advantage inputs in equity theory, the contributions employees make to the organization instrumentality the perceived relationship between performance and rewards integrative conflict resolution an approach to dealing with conflict in which both parties deal with the conflict by indicating their preferences and then working together to find an alternative the meets the needs of both intermittent reinforcement schedule a schedule in which consequences are delivered after a specified or average time has elapsed or after a specified or average number of behaviors has occurred internal environment the events and trends inside an organization that affect management, employees, and organizational culture internal locus of control the belief that what happens to you is largely the result of your own actions internal motivation motivation that comes from the job itself rather than from outside rewards internal recruiting the process of developing a pool of qualified job applicants from people who already work in the company interorganizational process a collection of activities that take place among companies to transform inputs into outputs that customers value interpersonal skills skills, such as listening, communicating, questioning, and providing feedback, that enable people to have effective working relationships with others interviews a selection tool in which company representatives ask job applicants job-related questions to determine whether they are qualified for the job intranets private company networks that allow employees to easily access, share, and publish information using Internet software intraorganizational process the collection of activities that take place within an organization to transform inputs into outputs that customers value intrapreneurship entrepreneurship within an existing organization intrinsic reward a natural reward associated with performing a task or activity for its own sake inventory the amount and number of raw materials, parts, and finished products that a company has in its possession inventory turnover the number of times per year that a company sells or “turns over” its average inventory
Glossary
J job analysis a purposeful, systematic process for collecting information on the important work-related aspects of a job job characteristics model (JCM) an approach to job redesign that seeks to formulate jobs in ways that motivate workers and lead to positive work outcomes job description a written description of the basic tasks, duties, and responsibilities required of an employee holding a particular job job design the number, kind, and variety of tasks that individual workers perform in doing their jobs job enlargement increasing the number of different tasks that a worker performs within one particular job job enrichment increasing the number of tasks in a particular job and giving workers the authority and control to make meaningful decisions about their work job evaluation a process that determines the worth of each job in a company by evaluating the market value of the knowledge, skills, and requirements needed to perform it job rotation periodically moving workers from one specialized job to another to give them more variety and the opportunity to use different skills job shops manufacturing operations that handle custom orders or small batch jobs job specialization a job composed of a small part of a larger task or process job specifications a written summary of the qualifications needed to successfully perform a particular job joint venture a strategic alliance in which two existing companies collaborate to form a third, independent company just-in-time (JIT) inventory system an inventory system in which component parts arrive from suppliers just as they are needed at each stage of production
K kanban a ticket-based JIT system that indicates when to reorder inventory kinesics movements of the body and face knowledge the understanding that one gains from information
L leader role the interpersonal role managers play when they motivate and encourage workers to accomplish organizational objectives leader-member relations the degree to which followers respect, trust, and like their leaders leadership the process of influencing others to achieve group or organizational goals leadership neutralizers subordinate, task, or organizational characteristics that can interfere with a leader’s actions or make it impossible for a leader to influence followers’ performance leadership style the way a leader generally behaves toward followers leadership substitutes subordinate, task, or organizational characteristics that make leaders redundant or unnecessary leading inspiring and motivating workers to work hard to achieve organizational goals learning-based planning learning better ways of achieving goals by continually testing, changing, and improving plans and strategies
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legal responsibility the expectation that a company will obey society’s laws and regulations liaison role the interpersonal role managers play when they deal with people outside their units licensing an agreement in which a domestic company, the licensor, receives royalty payments for allowing another company, the licensee, to produce the licensor’s product, sell its service, or use its brand name in a specified foreign market line authority the right to command immediate subordinates in the chain of command line function an activity that contributes directly to creating or selling the company’s products line-flow production manufacturing processes that are preestablished, occur in a serial or linear manner, and are dedicated to making one type of product listening making a conscious effort to hear local adaptation when a multinational company modifies its rules, guidelines, policies, and procedures to adapt to differences in foreign customers, governments, and regulatory agencies locus of control the degree to which individuals believe that their actions can influence what happens to them
M Maastricht Treaty of Europe a regional trade agreement between most European countries Machiavellian the extent to which individuals believe that virtually any type of behavior is acceptable in trying to satisfy their needs or meet their goals magnitude of consequences the total harm or benefit derived from an ethical decision make-to-order operation a manufacturing operation that does not start processing or assembling products until a customer order is received make-to-stock operation a manufacturing operation that orders parts and assembles standardized products before receiving customer orders management getting work done through others management by objectives (MBO) a four-step process in which managers and employees discuss and select goals, develop tactical plans, and meet regularly to review progress toward goal accomplishment manufacturing flexibility the degree to which manufacturing operations can easily and quickly change the number, kind, and characteristics of products they produce market commonality the degree to which two companies have overlapping products, services, or customers in multiple markets materials requirement planning (MRP) a production and inventory system that determines the production schedule, production batch sizes, and inventory needed to complete final products matrix departmentalization a hybrid organizational structure in which two or more forms of departmentalization, most often product and functional, are used together maximizing choosing the best alternative mechanistic organization an organization characterized by specialized jobs and responsibilities, precisely defined, unchanging roles, and a rigid chain of command based on centralized authority and vertical communication
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media advocacy an advocacy group tactic that involves framing issues as public issues; exposing questionable, exploitative, or unethical practices; and forcing media coverage by buying media time or creating controversy that is likely to receive extensive news coverage meta-analysis a study of studies, a statistical approach that provides one of the best scientific estimates of how well management theories and practices work middle managers managers responsible for setting objectives consistent with top management’s goals and for planning and implementing subunit strategies for achieving these objectives milestones formal project review points used to assess progress and performance mission a statement of a company’s overall goal that unifies company-wide efforts toward its vision, stretches and challenges the organization, and possesses a finish line and a time frame modular organization an organization that outsources noncore business activities to outside companies, suppliers, specialists, or consultants monitor role the informational role managers play when they scan their environment for information monochronic cultures cultures in which people tend to do one thing at a time and view time as linear mood linkage a phenomenon in which one worker’s negative affectivity and bad moods can spread to others Moore’s law the prediction that every 18 months, the cost of computing will drop by 50 percent as computerprocessing power doubles motion study breaking each task or job into its separate motions and then eliminating those that are unnecessary or repetitive motivation the set of forces that initiates, directs, and makes people persist in their efforts to accomplish a goal motivation to manage an assessment of how enthusiastic employees are about managing the work of others multifactor productivity an overall measure of performance that indicates how much labor, capital, materials, and energy it takes to produce an output multifunctional teams work teams composed of people from different departments multinational corporation a corporation that owns businesses in two or more countries
N national culture the set of shared values and beliefs that affects the perceptions, decisions, and behavior of the people from a particular country needs the physical or psychological requirements that must be met to ensure survival and well-being needs assessment the process of identifying and prioritizing the learning needs of employees negative affectivity a personality trait in which individuals tend to notice and focus on the negative aspects of themselves and their environments negative reinforcement reinforcement that strengthens behavior by withholding an unpleasant consequence when employees perform a specific behavior negotiator role the decisional role managers play when they negotiate schedules, projects, goals, outcomes, resources, and employee raises
Glossary
neutral cultures cultures in which people do not display emotions and feelings when communicating noise anything that interferes with the transmission of the intended message nominal group technique a decision-making method that begins and ends by having group members quietly write down and evaluate ideas to be shared with the group nonsubstitutable resource a resource that produces value or competitive advantage and has no equivalent substitutes or replacements nontariff barriers nontax methods of increasing the cost or reducing the volume of imported goods nonverbal communication any communication that doesn’t involve words normative control the regulation of workers’ behavior and decisions through widely shared organizational values and beliefs normative decision theory a theory that suggests how leaders can determine an appropriate amount of employee participation when making decisions norming the third stage of team development, in which team members begin to settle into their roles, group cohesion grows, and positive team norms develop norms informally agreed-on standards that regulate team behavior North American Free Trade Agreement (NAFTA) a regional trade agreement between the United States, Canada, and Mexico
O objective control the use of observable measures of worker behavior or outputs to assess performance and influence behavior objective performance measures measures of job performance that are easily and directly counted or quantified online discussion forums the in-house equivalent of Internet newsgroups. By using Web- or software-based discussion tools that are available across the company, employees can easily ask questions and share knowledge with each other. open office systems offices in which the physical barriers that separate workers have been removed in order to increase communication and interaction open systems systems that can sustain themselves only by interacting with their environments, on which they depend for their survival openness to experience the degree to which someone is curious, broad-minded, and open to new ideas, things, and experiences; is spontaneous; and has a high tolerance for ambiguity operational plans day-to-day plans, developed and implemented by lower-level managers, for producing or delivering the organization’s products and services over a 30-day to six-month period operations management managing the daily production of goods and services opportunistic behavior a transaction in which one party in the relationship benefits at the expense of the other optical character recognition the ability of software to convert digitized documents into ASCII text (American Standard Code for Information Interchange) that can be searched,
Glossary
read, and edited by word processing and other kinds of software options-based planning maintaining planning flexibility by making small, simultaneous investments in many alternative plans ordering cost the costs associated with ordering inventory, including the cost of data entry, phone calls, obtaining bids, correcting mistakes, and determining when and how much inventory to order organic organization an organization characterized by broadly defined jobs and responsibility, loosely defined, frequently changing roles, and decentralized authority and horizontal communication based on task knowledge organization a system of consciously coordinated activities or forces created by two or more people organizational change a difference in the form, quality, or condition of an organization over time organizational culture the values, beliefs, and attitudes shared by organizational members organizational decline a large decrease in organizational performance that occurs when companies don’t anticipate, recognize, neutralize, or adapt to the internal or external pressures that threaten their survival organizational development a philosophy and collection of planned change interventions designed to improve an organization’s long-term health and performance organizational heroes people celebrated for their qualities and achievements within an organization organizational innovation the successful implementation of creative ideas in organizations organizational plurality a work environment where (1) all members are empowered to contribute in a way that maximizes the benefits to the organization, customers, and themselves, and (2) the individuality of each member is respected by not segmenting or polarizing people on the basis of their membership in a particular group organizational process the collection of activities that transform inputs into outputs that customers value organizational silence when employees withhold information about organizational problems or issues organizational stories stories told by organizational members to make sense of organizational events and changes and to emphasize culturally consistent assumptions, decisions, and actions organizational structure the vertical and horizontal configuration of departments, authority, and jobs within a company organizing deciding where decisions will be made, who will do what jobs and tasks, and who will work for whom outcome/input (O/I) ratio in equity theory, an employee’s perception of how the rewards received from an organization compare with the employee’s contributions to that organization outcomes in equity theory, the rewards employees receive for their contributions to the organization outplacement services employment-counseling services offered to employees who are losing their jobs because of downsizing output control the regulation of workers’ results or outputs through rewards and incentives overreward when you are getting more outcomes relative to inputs than the referent to whom you compare yourself
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overt integrity test a written test that estimates job applicants’ honesty by directly asking them what they think or feel about theft or about punishment of unethical behaviors
P paralanguage the pitch, rate, tone, volume, and speaking pattern (i.e., use of silences, pauses, or hesitations) of one’s voice partial productivity a measure of performance that indicates how much of a particular kind of input it takes to produce an output participative leadership a leadership style in which the leader consults employees for their suggestions and input before making decisions path-goal theory a leadership theory that states that leaders can increase subordinate satisfaction and performance by clarifying and clearing the paths to goals and by increasing the number and kinds of rewards available for goal attainment perception the process by which individuals attend to, organize, interpret, and retain information from their environments perceptual filters the personality-, psychology-, or experiencebased differences that influence people to ignore or pay attention to particular stimuli performance appraisal the process of assessing how well employees are doing their jobs performance feedback information about the quality or quantity of past performance that indicates whether progress is being made toward the accomplishment of a goal performing the fourth and final stage of team development, in which performance improves because the team has matured into an effective, fully functioning team personal aggression hostile or aggressive behavior toward others personality the relatively stable set of behaviors, attitudes, and emotions displayed over time that makes people different from each other personality-based integrity test a written test that indirectly estimates job applicants’ honesty by measuring psychological traits, such as dependability and conscientiousness personality tests tests that measure the extent to which applicants possess different kinds of job-related personality dimensions phased retirement employees transition to retirement by working reduced hours over a period of time before completing retiring piecework a compensation system in which employees are paid a set rate for each item they produce planning (management functions) determining organizational goals and a means for achieving them planning choosing a goal and developing a strategy to achieve that goal policy a standing plan that indicates the general course of action that should be taken in response to a particular event or situation policy uncertainty the risk associated with changes in laws and government policies that directly affect the way foreign companies conduct business
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political deviance using one’s influence to harm others in the company political uncertainty the risk of major changes in political regimes that can result from war, revolution, death of political leaders, social unrest, or other influential events polychronic cultures cultures in which people tend to do more than one thing at a time and view times as circular pooled interdependence work completed by having each job or department independently contribute to the whole portfolio strategy a corporate-level strategy that minimizes risk by diversifying investment among various businesses or product lines position power the degree to which leaders are able to hire, fire, reward, and punish workers positive affectivity a personality trait in which individuals tend to notice and focus on the positive aspects of themselves and their environments positive reinforcement reinforcement that strengthens behavior by following behaviors with desirable consequences postconventional level of moral development the third level of moral development in which people make decisions based on internalized principles preconventional level of moral development the first level of moral development in which people make decisions based on selfish reasons predictive patterns patterns that help identify database elements that are different primary stakeholder any group on which an organization relies for its long-term survival principle of distributive justice an ethical principle that holds that you should never take any action that harms the least among us: the poor, the uneducated, the unemployed principle of government requirements an ethical principle that holds that you should never take any action that violates the law, for the law represents the minimal moral standard principle of individual rights an ethical principle that holds that you should never take any action that infringes on others’ agreed-upon rights principle of long-term self-interest an ethical principle that holds that you should never take any action that is not in your or your organization’s long-term self-interest principle of personal virtue an ethical principle that holds that you should never do anything that is not honest, open, and truthful and that you would not be glad to see reported in the newspapers or on TV principle of religious injunctions an ethical principle that holds that you should never take any action that is not kind and that does not build a sense of community principle of utilitarian benefits an ethical principle that holds that you should never take any action that does not result in greater good for society private spaces spaces used by and open to just one employee proactive strategy a social responsiveness strategy in which a company anticipates responsibility for a problem before it occurs and does more than society expects to address the problem probability of effect the chance that something will happen and then harm others
Glossary
problem a gap between a desired state and an existing state procedural justice the perceived fairness of the process used to make reward allocation decisions procedure a standing plan that indicates the specific steps that should be taken in response to a particular event processing cost the cost of turning raw data into usable information processing information transforming raw data into meaningful information product boycott an advocacy group tactic that involves protesting a company’s actions by convincing consumers not to purchase its product or service product departmentalization organizing work and workers into separate units responsible for producing particular products or services product prototype a full-scale, working model that is being tested for design, function, and reliability production blocking a disadvantage of face-to-face brainstorming in which a group member must wait to share an idea because another member is presenting an idea production deviance unethical behavior that hurts the quality and quantity of work produced productivity a measure of performance that indicates how many inputs it takes to produce or create an output profit sharing a compensation system in which a company pays a percentage of its profits to employees in addition to their regular compensation project team a team created to complete specific, one-time projects or tasks within a limited time project manufacturing manufacturing operations designed to produce large, expensive, specialized products property deviance unethical behavior aimed at the organization’s property or products prospectors an adaptive strategy that seeks fast growth by searching for new market opportunities, encouraging risk taking, and being the first to bring innovative new products to market protecting information the process of ensuring that data are reliably and consistently retrievable in a usable format for authorized users, but no one else protectionism a government’s use of trade barriers to shield domestic companies and their workers from foreign competition proximal goals short-term goals or subgoals proximity of effect the social, psychological, cultural, or physical distance between a decision maker and those affected by his or her decisions public communications an advocacy group tactic that relies on voluntary participation by the news media and the advertising industry to get the advocacy group’s message out punctuated equilibrium theory a theory that holds that companies go through long, simple periods of stability (equilibrium), followed by short periods of dynamic, fundamental change (revolution), and ending with a return to stability (new equilibrium) punishment reinforcement that weakens behavior by following behaviors with undesirable consequences purchasing power a comparison of the relative cost of a standard set of goods and services in different countries
Glossary
Q quality a product or service free of deficiencies, or the characteristics of a product or service that satisfy customer needs question mark a company with a small share of a fast-growing market quid pro quo sexual harassment a form of sexual harassment in which employment outcomes, such as hiring, promotion, or simply keeping one’s job, depend on whether an individual submits to sexual harassment quota a limit on the number or volume of imported products
R racial and ethnic discrimination treating people differently because of their race or ethnicity radio frequency identification (RFID) tags tags containing minuscule microchips that transmit information via radio waves and can be used to track the number and location of the objects into which the tags have been inserted rare resources resources that are not controlled or possessed by many competing firms rate buster a group member whose work pace is significantly faster than the normal pace in his or her group rater training training performance appraisal raters in how to avoid rating errors and increase rating accuracy rational decision making a systematic process of defining problems, evaluating alternatives, and choosing optimal solutions raw data facts and figures raw material inventories the basic inputs in a manufacturing process reactive strategy a social responsiveness strategy in which a company does less than society expects reactors an adaptive strategy of not following a consistent strategy, but instead reacting to changes in the external environment after they occur reciprocal interdependence work completed by different jobs or groups working together in a back-and-forth manner recovery the strategic actions taken after retrenchment to return to a growth strategy recruiting the process of developing a pool of qualified job applicants reengineering fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical measures of performance, such as cost, quality, service, and speed referents in equity theory, others with whom people compare themselves to determine if they have been treated fairly refreezing supporting and reinforcing new changes so that they “stick” regional trading zones areas in which tariff and nontariff barriers on trade between countries are reduced or eliminated regulation costs the costs associated with implementing or maintaining control reinforcement the process of changing behavior by changing the consequences that follow behavior reinforcement contingencies cause-and-effect relationships between the performance of specific behaviors and specific consequences reinforcement theory a theory that states that behavior is a function of its consequences, that behaviors followed by
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positive consequences will occur more frequently, and that behaviors followed by negative consequences, or not followed by positive consequences, will occur less frequently related diversification creating or acquiring companies that share similar products, manufacturing, marketing, technology, or cultures relationship behavior mutually beneficial, long-term exchanges between buyers and suppliers relative comparisons a process in which each decision criterion is compared directly to every other criterion representative bias the unrecognized tendency of decision makers to judge the likelihood of an event’s occurrence based on its similarity to previous events resistance forces forces that support the existing state of conditions in organizations resistance to change opposition to change resulting from selfinterest, misunderstanding and distrust, or a general intolerance for change resource allocator role the decisional role managers play when they decide who gets what resources resource scarcity the degree to which an organization’s external environment has an abundance or scarcity of critical organizational resources resource similarity the extent to which a competitor has similar amounts and kinds of resources resources the assets, capabilities, processes, information, and knowledge that an organization uses to improve its effectiveness and efficiency, create and sustain competitive advantage, and fulfill a need or solve a problem response a competitive countermove, prompted by a rival’s attack, to defend or improve a company’s market share or profit results-driven change change created quickly by focusing on the measurement and improvement of results retrenchment strategy a strategy that focuses on turning around very poor company performance by shrinking the size or scope of the business retrieval cost the cost of accessing already-stored and processed information risk propensity a person’s tendency to take or avoid risks rules and regulations standing plans that describe how a particular action should be performed, or what must happen or not happen in response to a particular event
S S.M.A.R.T. goals goals that are specific, measurable, attainable, realistic, and timely satisficing choosing a “good enough” alternative schedule of reinforcement rules that specify which behaviors will be reinforced, which consequences will follow those behaviors, and the schedule by which those consequences will be delivered schedule time a cultural norm for the time by which scheduled projects or jobs should actually be completed scientific management thoroughly studying and testing different work methods to identify the best, most efficient way to complete a job S-curve pattern of innovation a pattern of technological innovation characterized by slow initial progress, then
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rapid progress, and then slow progress again as a technology matures and reaches its limits secondary firms the firms in a strategic group that follow strategies related to but somewhat different from those of the core firms secondary stakeholder any group that can influence or be influenced by a company and can affect public perceptions about its socially responsible behavior secure sockets layer (SSL) encryption Internet browser–based encryption that provides secure off-site Web access to some data and programs selection the process of gathering information about job applicants to decide who should be offered a job selective perception the tendency to notice and accept objects and information consistent with our values, beliefs, and expectations, while ignoring or screening out or not accepting inconsistent information self-control (self-management) a control system in which managers and workers control their own behavior by setting their own goals, monitoring their own progress, and rewarding themselves for goal achievement self-designing team a team that has the characteristics of selfmanaging teams but also controls team design, work tasks, and team membership self-managing team a team that manages and controls all of the major tasks of producing a product or service self-serving bias the tendency to overestimate our value by attributing successes to ourselves (internal causes) and attributing failures to others or the environment (external causes) semi-autonomous work group a group that has the authority to make decisions and solve problems related to the major tasks of producing a product or service sequence patterns when two or more database elements occur together in a significant pattern, but one of the elements precedes the other sequential interdependence work completed in succession, with one group’s or job’s outputs becoming the inputs for the next group or job service recovery restoring customer satisfaction to strongly dissatisfied customers setup cost the costs of downtime and lost efficiency that occur when a machine is changed or adjusted to produce a different kind of inventory sexual harassment a form of discrimination in which unwelcome sexual advances, requests for sexual favors, or other verbal or physical conduct of a sexual nature occurs while performing one’s job shadow-strategy task force a committee within a company that analyzes the company’s own weaknesses to determine how competitors could exploit them for competitive advantage shared spaces spaces used by and open to all employees shareholder model a view of social responsibility that holds that an organization’s overriding goal should be profit maximization for the benefit of shareholders simple environment an environment with few environmental factors simple matrix a form of matrix departmentalization in which managers in different parts of the matrix negotiate conflicts and resources single-use plans plans that cover unique, one-time-only events
Glossary
situational (SWOT) analysis an assessment of the strengths and weaknesses in an organization’s internal environment and the opportunities and threats in its external environment situational favorableness the degree to which a particular situation either permits or denies a leader the chance to influence the behavior of group members situational theory a leadership theory that states that leaders need to adjust their leadership styles to match their followers’ readiness skill-based pay compensation system that pays employees for learning additional skills or knowledge skills-based diversity training training that teaches employees the practical skills they need for managing a diverse work force, such as flexibility and adaptability, negotiation, problem solving, and conflict resolution skill variety the number of different activities performed in a job slack resources a cushion of extra resources that can be used with options-based planning to adapt to unanticipated change, problems, or opportunities social consensus agreement on whether behavior is bad or good social integration the degree to which group members are psychologically attracted to working with each other to accomplish a common objective social loafing behavior in which team members withhold their efforts and fail to perform their share of the work social responsibility a business’s obligation to pursue policies, make decisions, and take actions that benefit society social responsiveness the strategy chosen by a company to respond to stakeholders’ economic, legal, ethical, or discretionary expectations concerning social responsibility soldiering when workers deliberately slow their pace or restrict their work outputs specific ability tests (aptitude tests) tests that measure the extent to which an applicant possesses the particular kind of ability needed to do a job well specific environment the customers, competitors, suppliers, industry regulations, and advocacy groups that are unique to an industry and directly affect how a company does business spokesperson role the informational role managers play when they share information with people outside their departments or companies stability strategy a strategy that focuses on improving the way in which the company sells the same products or services to the same customers stable environment an environment in which the rate of change is slow staff authority the right to advise, but not command, others who are not subordinates in the chain of command staff function an activity that does not contribute directly to creating or selling the company’s products, but instead supports line activities stakeholder model a theory of corporate responsibility that holds that management’s most important responsibility, long-term survival, is achieved by satisfying the interests of multiple corporate stakeholders stakeholders persons or groups with a “stake” or legitimate interest in a company’s actions
Glossary
standardization solving problems by consistently applying the same rules, procedures, and processes standards a basis of comparison for measuring the extent to which various kinds of organizational performance are satisfactory or unsatisfactory standing plans plans used repeatedly to handle frequently recurring events star a company with a large share of a fast-growing market stepladder technique a decision-making method in which group members are added to a group discussion one at a time (i.e., like a stepladder). The existing group members listen to each new member’s thoughts, ideas, and recommendations; then the group shares the ideas and suggestions that it had already considered, discusses the new and old ideas, and makes a decision. stock options a compensation system that gives employees the right to purchase shares of stock at a set price, even if the value of the stock increases above that price stockout the situation when a company runs out of finished product stockout costs the costs incurred when a company runs out of a product, including transaction costs to replace inventory and the loss of customers’ goodwill storage cost the cost of physically or electronically archiving information for later use and retrieval storming the second stage of development, characterized by conflict and disagreement, in which team members disagree over what the team should do and how it should do it strategic alliance an agreement in which companies combine key resources, costs, risk, technology, and people strategic dissonance a discrepancy between a company’s intended strategy and the strategic actions managers take when implementing that strategy strategic group a group of companies within an industry that top managers choose to compare, evaluate, and benchmark strategic threats and opportunities strategic leadership the ability to anticipate, envision, maintain flexibility, think strategically, and work with others to initiate changes that will create a positive future for an organization strategic plans overall company plans that clarify how the company will serve customers and position itself against competitors over the next two to five years strategic reference points the strategic targets managers use to measure whether a firm has developed the core competencies it needs to achieve a sustainable competitive advantage stretch goals extremely ambitious goals that employees initially don’t know how to accomplish structural accommodation the ability to change organizational structures, policies, and practices in order to meet stretch goals structured interviews interviews in which all applicants are asked the same set of standardized questions, usually including situational, behavioral, background, and job-knowledge questions subjective performance measures measures of job performance that require someone to judge or assess a worker’s performance suboptimization performance improvement in one part of an organization but only at the expense of decreased performance in another part
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subsidies government loans, grants, and tax deferments given to domestic companies to protect them from foreign competition subsystems smaller systems that operate within the context of a larger system supervised data mining the process when the user tells the data mining software to look and test for specific patterns and relationships in a data set supplier dependence the degree to which a company relies on a supplier because of the importance of the supplier’s product to the company and the difficulty of finding other sources of that product suppliers companies that provide material, human, financial, and informational resources to other companies supportive leadership a leadership style in which the leader is friendly to and approachable, shows concern for employees and their welfare, treats them as equals, and creates a friendly climate surface-level diversity differences such as age, gender, race/ethnicity, and physical disabilities that are observable, typically unchangeable, and easy to measure survey feedback information that is collected by surveys from organizational members and then compiled, disseminated, and used to develop action plans for improvement sustainable competitive advantage a competitive advantage that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate synergy when two or more subsystems working together can produce more than they can working apart system a set of interrelated elements or parts that function as a whole
T tactical plans plans created and implemented by middle managers that specify how the company will use resources, budgets, and people over the next six months to two years to accomplish specific goals within its mission tariff a direct tax on imported goods task identity the degree to which a job, from beginning to end, requires the completion of a whole and identifiable piece of work task interdependence the extent to which collective action is required to complete an entire piece of work task significance the degree to which a job is perceived to have a substantial impact on others inside or outside the organization task structure the degree to which the requirements of a subordinate’s tasks are clearly specified team diversity the variances or differences in ability, experience, personality, or any other factor on a team team leaders managers responsible for facilitating team activities toward goal accomplishment team level the average level of ability, experience, personality, or any other factor on a team teamwork collaboration between managers and nonmanagers, across business functions, and between companies, customers, and suppliers technical skills the ability to apply the specialized procedures, techniques, and knowledge required to get the job done
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technological discontinuity a scientific advance or unique combination of existing technologies that creates a significant breakthrough in performance or function technological lockout when a new dominant design (i.e., a significantly better technology) prevents a company from competitively selling its products or makes it difficult to do so technological substitution the purchase of new technologies to replace older ones technology the knowledge, tools, and techniques used to transform input into output technology cycle a cycle that begins with the “birth” of a new technology and ends when that technology reaches its limits and is replaced by a newer, substantially better technology televised/videotaped speeches and meetings speeches and meetings originally made to a smaller audience that are either simultaneously broadcast to other locations in the company or videotaped for subsequent distribution and viewing temporal immediacy the time between an act and the consequences the act produces testing the systematic comparison of different product designs or design iterations threat of new entrants a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry threat of substitute products or services a measure of the ease with which customers can find substitutes for an industry’s products or services 360-degree feedback a performance appraisal process in which feedback is obtained from the boss, subordinates, peers and coworkers, and the employees themselves time study timing how long it takes good workers to complete each part of their jobs top managers executives responsible for the overall direction of the organization total quality management (TQM) an integrated, principlebased, organization-wide strategy for improving product and service quality trade barriers government-imposed regulations that increase the cost and restrict the number of imported goods traditional work group a group composed of two or more people who work together to achieve a shared goal training developing the skills, experience, and knowledge employees need to perform their jobs or improve their performance trait rating scales rating scales that indicate the extent to which workers possess particular traits or characteristics trait theory a leadership theory that holds that effective leaders possess a similar set of traits or characteristics traits relatively stable characteristics, such as abilities, psychological motives, or consistent patterns of behavior transactional leadership leadership based on an exchange process, in which followers are rewarded for good performance and punished for poor performance transformational leadership leadership that generates awareness and acceptance of a group’s purpose and mission and gets employees to see beyond their own needs and self-interests for the good of the group transient firms the firms in a strategic group whose strategies are changing from one strategic position to another
Glossary
transition management team (TMT) a team of 8 to 12 people whose full-time job is to manage and coordinate a company’s change process two-factor authentication authentication based on what users know, such as a password and what they have in their possession, such as a secure ID card or key Type A personality a person who tries to complete as many tasks as possible in the shortest possible time and is hard driving, competitive, impatient, perfectionistic, angry, and unable to relax Type A/B personality dimension the extent to which people tend toward impatience, hurriedness, competitiveness, and hostility Type B personality a person who is relaxed, easygoing, and able to engage in leisure activities without worrying about work
U uncertainty extent to which managers can understand or predict which environmental changes and trends will affect their businesses underreward when the referent you compare yourself to is getting more outcomes relative to inputs than you are unethical charismatics charismatic leaders who control and manipulate followers, do what is best for themselves instead of their organizations, want to hear only positive feedback, share only information that is beneficial to themselves, and have moral standards that put their interests before everyone else’s unfreezing getting the people affected by change to believe that change is needed unity of command a management principle that workers should report to just one boss unrelated diversification creating or acquiring companies in completely unrelated businesses unstructured interviews interviews in which interviewers are free to ask the applictants anything they want unsupervised data mining the process when the user simply tells the data mining software to uncover whatever patterns and relationships it can find in a data set upward communication communication that flows from lower to higher levels in an organization
V valence the attractiveness or desirability of a reward or outcome validation the process of determining how well a selection test or procedure predicts future job performance. The better or more accurate the prediction of future job performance, the more valid a test is said to be. valuable resource a resource that allows companies to improve efficiency and effectiveness value customer perception that the product quality is excellent for the price offered variable interval reinforcement schedule an intermittent schedule in which the time between a behavior and the following consequences varies around a specified average variable ratio reinforcement schedule an intermittent schedule in which consequences are delivered following a different number of behaviors, sometimes more and sometimes less, that vary around a specified average number of behaviors
Glossary
variation a deviation in the form, condition, or appearance of a product from the quality standard for that product virtual organization an organization that is part of a network in which many companies share skills, costs, capabilities, markets, and customers to collectively solve customer problems or provide specific products or services virtual private network (VPN) software that securely encrypts data sent by employees outside the company network, decrypts the data when they arrive within the company computer network, and does the same when data are sent back to employees outside the network virtual team a team composed of geographically and/or organizationally dispersed coworkers who use telecommunication and information technologies to accomplish an organizational task virus a program or piece of code that, against your wishes, attaches itself to other programs on your computer and can trigger anything from a harmless flashing message to the reformatting of your hard drive to a systemwide network shutdown visible artifacts visible signs of an organization’s culture, such as the office design and layout, company dress code, and company benefits and perks, like stock options, personal parking spaces, or the private company dining room vision an inspirational statement of an organization’s enduring purpose visionary leadership leadership that creates a positive image of the future that motivates organizational members and provides direction for future planning and goal setting voluntary export restraints voluntarily imposed limits on the number or volume of products exported to a particular country
W Web services using standardized protocols to describe data from one company in such a way that those data can auto-
679
matically be read, understood, transcribed, and processed by different computer systems in another company whistleblowing reporting others’ ethics violations to management or legal authorities wholly owned affiliates foreign offices, facilities, and manufacturing plants that are 100 percent owned by the parent company work force forecasting the process of predicting the number and kind of workers with specific skills and abilities that an organization will need in the future work sample tests tests that require applicants to perform tasks that are actually done on the job work team a small number of people with complementary skills who hold themselves mutually accountable for pursuing a common purpose, achieving performance goals, and improving interdependent work processes worker readiness the ability and willingness to take responsibility for directing one’s behavior at work workplace deviance unethical behavior that violates organizational norms about right and wrong work-in-process inventories partially finished goods consisting of assembled component parts World Trade Organization (WTO) as the successor to GATT, the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably, and freely as possible. wrongful discharge a legal doctrine that requires employers to have a job-related reason to terminate employees
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name index A A&W Restaurants, 249 AARP (American Association of Retired Persons), 390 ABC, 80 Abledata, 395 Academy of Management Executive, 38 Academy of Management Journal, 7, 38 Academy of Management Review, 7, 38 The Accident Group, 425–426 Ace Hardware, 185 Acura, 464 Acxiom, 559–560 Adams, Diane, 133 Adams, Ed, 403 Addessi, Joan, 107, 108, 109, 110–111 Addessi, Richard, 107, 108 Addington, Gordon, 120 Adelphia, 100 Adidas-Salomon, 247 Adler, Nancy J., 507 Administrative Science Quarterly, 7, 38 Adobe, 562 Advance Auto Parts, 305 Aer Lingus, 582 Agilent, 435, 493–494 Agile Web, 298–299 Agnello, William, 296 Ahold USA, 415 Airbus, 147, 148, 149, 485 AirTran, 485 Air Transport World, 543 Albano, Monica, 350 Albertson’s, 415 Albin Engineering, 431 Albin, Marc, 431 Alderfer, Clayton P., 419 Alexander, Allison, 465 Alexander, Shane, 465 Alexander, Tom, 528–529 Alitalia, 582 Allen, Jay, 247 Allstate, 432 Alteon WebSystems, 154–155 Amazon.com, 3, 569 AMD, 254 American Airlines, 72, 582 American College Testing, 360 American Council of the Blind, 395
American Express, 574 American Heart Association, 69, 193 American National Standards Institute, 589, 590 American Society for Quality, 586, 590 American Society of Mechanical Engineers, 42 America West, 485 America Online (AOL), 11, 168, 542 Ameritech Corporation, 375 AMP, 261 Anda, Luis de, 245 Angelini, Greg, 436 Angle, Colin, 525 Anheuser-Busch, 239 Apache Medical Systems, 574 Apple Computer, 210, 297, 322, 601–602 Appling, Troy, 567 Aramark, 478 Argenti, Paul, 486 Argosy Education Group, 497 Arizona Public Service Company, 486 Arizona Republic, 177 Arkwright, Richard, 37 Armstrong, Neil, 143 The Art of War (Sun Tzu), 36 Asian Wall Street Journal, 543 Associated Business Systems, 143 Associated Press, 16 Asutek Computers, 297 AT&T, 5, 10, 54, 171, 185, 251 Atkins diet, 71 Atlantic Records, 572 Atwaters, 221 Audi, 464, 525 AutoDesk, 418 Auto-Zone, 305 Avery Dennison Corporation, 214 Avis, 195 Avon, 346 Axcellis Technologies, 260–261 Axtell, Roger E., 506 Ayers, Barbara, 383
B Babbage, Charles, 212 Bailey, Sheldon, 248 Baird, John, 212 Baker, Charlie, 124
Baker, Stephen, 601–602 Bakke, Dennis, 286 Ballew, Paul, 600 Ballmer, Steve, 16, 272, 281, 282 Ball, Sharon, 357 Banana Republic, 99, 529 Banga, M. S., 190 The Bankers Bank, 567 Bank of America (BoA), 227–228 Bank One, 401 Baptist, Douglas, 208–209 Baratta, Sandy, 116 Bare, Mike, 525–526 Barger, Dave, 440 Barlow, Jeanette, 570 Barnard, Chester, 34, 54–56 Barneys, 219 Barnholt, Ned, 435, 493–494 Barron’s, 176 Baseler, Randy, 147 Baxter International, 434, 512 Bayer, 274 Becoming a Manager: Mastery of a New Identity (Hill), 21–23 Behlen Manufacturing, 339–340 Bell, Alexander Graham, 212 Bell Atlantic, 385 Bello, Leslie, 195 BellSouth, 115, 167 Ben & Jerry’s, 125 Bennis, Warren, 451 Beretta, Fabbrica d’Armi Pietro, 57 Bergelman, Mark, 218 Berkowitz, Amy, 311 Bernard, Suzanne, 260 Best Buy, 85 Bethune, Gordon, 92, 223, 224, 225–226, 461, 462 Bezos, Jeff, 3 Bic, 16–17 Bienaime, Jean-Jacques, 90 Bindner, Eric, 326 Bitfone Corporation, 252 Blake, R. R., 458–459 Blanchard, Kenneth, 467–469 The Blog Machine (Jarvis), 497 Blonsick, John S., 397 Blunders in International Business (Ricks), 260 BMW, 156, 464, 525, 586 Boeing, 115, 147, 306, 343, 387, 537, 596 681
682
Bombardier Aerospace, 217 Bombardier, Inc., 260 Bonsignore, Michael, 513 Borden, George, 506 Borg, Anita, 392 Borick, Steve, 82 Bosch, 546 Boston Consulting Group, 14, 181–183 Boston Globe, 176 Bounty, 103 Bowa Builders, 89 Boyd, Jeff, 222 Boyle, Sharon, 585 Boy Scouts, 118 Brennan, Jack, 542 Breshears, Ron, 360 Brief, Art, 101–102 Brindley, Brigid, 420–421 Bristol-Myers, 92–93 British Airways, 582 British Royal Navy, 557 British Telecom, 251, 363 Britvic Corona, 248–249 Bronfman, Edgar, 173 Brookson, Stephen, 146 Brown, Arnold, 496 Brown, Jessica, 406 Brown, Kathleen, 195 BRW, 407 Bryant, Jim, 249 Buchanan, Jim, 228 Budgeting Basics & Beyond (Shim and Siegel), 146 Budweiser, 596 Buerhaus, Peter, 370 Buick, 586 Burdick, Paul, 286 Bureau of Labor Statistics, 391 Burger King, 69, 80, 192, 193, 194, 583 Burlington Northern Railroad, 318–319 Burns, Dave, 319 Burns, Tom, 287 Burns, Ursula, 457 Businessculture.com, 506 Business Plans to Game Plans (King), 146 Business Traveler International, 543 Business Wire, 16
C Cadbury Schweppes, 248 Cadillac, 525, 586 Canada Cordage, 545 Canon, 80 Cantelo, Mike, 506 Capellas, Michael, 511 Cappelli, Peter, 374 CARE, 126 CareerBuilder.com, 350, 351 Careers and the Disabled, 395 Caremark International, 106 Caribou Coffee, 431 Carmichael, Pat, 407
Index
Carquest, 305 Carrasco, Emma, 511–512 Carrier, 275, 276 Carrier, Willis, 212 Carrigan, Pat, 4–5 Catalytica Pharmaceuticals, 404 Caterpillar, 306 Catholic Health System, 568 Caudle, Joe, 461 Caudwell, John, 528 Caulfield, John, 179 CBS, 80, 311 CCE, 277–278 CDW (Computer Discount Warehouse), 15, 77, 362, 420–421, 441 Celanese, 559 Center for Effective Organizations, 329 Center for Science in the Public Interest, 69, 122 Center for the Study of Work Teams, 310–311 Cerf, Vint, 212 Cerner Corporation, 501–502, 574 Cescau, Anthony, 280 Cessna, 315, 326, 327–328 CFO magazine, 475 Challenger, Gray & Christmas, 390–391 Challenger space shuttle, 154 Chambers, Jeff, 88 Chambers, John, 16, 347, 542 Champion International, 306 Champy, James, 291, 292 Chandra, Bidhan, 261 Chaparral Energy, 145 Charan, Ram, 92 Charles River Laboratories, 528 Charlotte Hornets, 141 ChevronTexaco, 250 Chicago Harvester, 37 Chicago Medical Center, 557–558, 560 Chicago Sun Times, 101 Chicago Tribune, 176 Chigo Air Conditioning, 368–369 Children’s Orchard, 283 Children’s Place, 524 Chillers, David, 513 Chrysler Corporation, 143, 584, 586 Chubb, 275 Chugach School District, 222 Ciba-Geigy, 177 CIGNA, 498 Cinemax, 11, 168 Cingular, 185 Cisco Systems, 16, 347, 362, 542 Citibank, 494 Citigroup, 114, 278–280, 508 City Telecom, 81 Clarke, Virginia, 388 Clark, Kevin, 420 Climate Engineering Corporation, 326
CNBC, 176 Cnet.com, 170 CNN, 168 Coca-Cola Company, 17, 80, 252–253, 277–278, 345, 350, 387, 454, 474, 540, 557 Cohen, Ben, 125 Colborne, Leo, 588 Colgate-Palmolive, 475 Collins, Rory, 7 Columbia/HCA, 117 Columbia space shuttle, 154, 512 Comcast, 81, 167, 168, 170 Comercial Mexicana SA, 246–247 Commercial Credit, 526 Compaq, 511 Competitive Advantage through People (Pfeffer), 24 CompuServe, 169 Conaway, Wayne, 506 Concelman, Jim, 497 Concert, 251 Conde Nast Traveler magazine, 543 Connor, Linda, 422 Consumer Product Safety Commission, 84 Consumer Reports, 149, 174, 229 Container Store, 189 Continental Airlines, 9, 16, 92, 223, 224, 225–226, 461, 462 Con-Way Central Express, 558 Cook, Roger, 397 Coolidge, Calvin, 135 Cool Talk, 80 Cordell, Phil, 596 Corning, 90 Coronado Bay Resort, 355 Cort, Henry, 37 Costco, 189, 346, 523, 530 Costley, Gary, 85 Coventry Mall, 524 Cox Cable, 171 Cox, Taylor, 405 Creative Learning and Child Care, 369 Cress, Jennifer, 341 Crockett, Bill, 141 Crown Cork, 314–315 Cruickshank, John, 101 Csikszentmihalyi, Mihaly, 212 C-Span, 148 CSX, 293, 325 Cubist Pharmaceuticals, 572 Cummins Engine, 306 Curtis, John, 595 Cushman & Wakefield Healy & Baker, 149–150 Custage, Dennis, 249–250 Cutler, Steven, 449 CVS, 523, 594 CyberAlert, 16 Cypress Semiconductor, 399
D Daewoo Motors, 581 Dahl, Roald, 569 DaimlerChrysler, 80, 85, 134, 217, 572, 596 Daimler, Gottlieb, 212 Dairy Queen, 4 Dalland, Todd, 204 Daniel, Rene, 524 Darby, Abraham, 37 Davis, Chuck, 433 Davis, Jim, 88 Davis, Richard, 123 Deavenport, Earnest, 591 De Beers Consolidated Mines, 81–82 Dehecq, Jean-François, 256 Dell, Inc., 5, 84, 118, 152, 174, 340, 351, 451, 541, 584–585, 596, 597, 603, 605 Dell, Michael, 5, 118, 451 Deloitte Touche Tohmatsu, 513 DeLorenzo, Richard, 222 Delta Air Lines, 11, 17, 72, 397 DeLuca, Fred, 501 DeMars & Associates, 21 DeMars, Jo, 21 DeMichele, Mark, 486 Democrat Gazette, 175 Denny’s, 385 Department of Justice, 345 Department of Labor, 84, 343, 345, 427 Descriptive Geometry (Monge), 58 Detroit Free Press, 175 Dexheimer, Jeff, 12 D. G. Yuengling & Son, 133, 416–417 DialAmerica Marketing, 12 Dial Corporation, 387 Dice.com, 351 DiCenso, Monica, 428 DirecTV, 167, 556 Discovery Communications, 437 Dish Network, 167, 556 DiSouza, Francis, 351 Dixon, Pam, 341 Domblides, John, 557 Domini 400 Social Index, 124 Dominican Hospital, 574 Domino’s Pizza, 337 Donna Karan, 532 Do’s and Taboos Around the World (Axtell), 506 Dostart, Karen, 525 Doughty, Robert, 193 Douglass, Kirk, 99 Douress, Joseph, 506 Dow Chemical, 362, 545 Dowell, Ben, 93 Dow Jones Company, 175, 176 Dowling, Donald, 506 Drew, Ernest, 388 Dr. Pepper, 80
Index
Drugstore.com, 564 Duck, Jeanie, 14 Duke’s Children’s Hospital, 536 Dun & Bradstreet’s Guide to Doing Business Around the World (Morrison, et al.), 506 Dunkelberg, John, 55 Dunkin’ Donuts, 195 DuPont, 203, 346, 404 Durel, Tom, 500–501 Durken, Diane, 374
E Earnhart, Stephen, 221 EarthLink, 168, 170, 171 EA Sports, 71, 187 Eastman Chemical, 330, 591 Eastman Kodak, 306, 374 East Providence, Rhode Island, Police Department, 351 Eaton Corporation, 309 eBay, 117 Ebbers, Bernard, 4, 102 Eckerd Drug Stores, 523 Eckert, Robert, 138, 510–511 Ecopledge.com, 84 Edge Software Services, 420 Edgewater Technology, 104 Edison International, 385 Edison, Thomas, 212 Edwardson, John, 15 Efficient Foodservice Response, 603 Egan, John, 584, 605 Egg Roll Hut, 524 Eisenhower, Dwight, 531 Eisen, Peter J., 539 Eisner, Michael, 435 Electric Boat, 436 Electronic Arts, 350, 418 Eli Lilly & Co., 188, 190 Ellinger, Deborah, 594 El Paso Corporation, 531 Emap Performance Television, 237 EMC Corporation, 588–589 Enron, 475–476 Enterprise Rent-a-Car, 195, 403, 513–514, 591 Environmental Protection Agency (EPA), 84 Epilepsy Foundation of America, 395 Epitec Group, 357 Equal Employment Opportunity Commission (EEOC), 84, 341, 342–343, 345, 346, 349, 386, 387, 390, 393, 405, 406 Ernst & Young, 511, 512 Esmond, Donald, 82 Esparza, Andy, 340 ESPN, 86 Essential Managers (Brookson), 146 Ethicspoint, 513
683
Ethics Resource Center, 151, 531 European Monitor, 149–150 European Union (EU), 545–546 Evans, Ali, 189 Everything 99 Cent store, 524 Executiveplanet.com, 506 ExxonMobil Corporation, 490
F Facility Information Systems (FIS), 555 Fair Labor Association, 247 Fandray, Dayton, 116 Fannie Mae, 100, 386 Farnsworth, Philo T., 212 Fast Company magazine, 470, 475 Fastow, Andrew, 475–476 Fayol, Henri, 5, 34, 46–49 Federal Aviation Administration (FAA), 485, 536 Federal Communications Commission (FCC), 84 Federal Reserve System, 84 Federal Trade Commission (FTC), 84 FedEx, 191, 513 Feuerstein, Aaron, 124 F. H. Faulding & Company, 90–91 Fiat, 190–191 Fiedler, F. E., 460–463 Fill, Cliff, 525 Finkel, James, 433 Fiorina, Carly, 452 First Command Financial Planning, 77 Fisher, Phillip, 295 Fisher, Roger, 50 FleetBoston Financial, 227–228 Florida Power & Light, 215 Florist Network, 435 FNS NewsClips Online, 16 Follet, Mary Parker, 34, 49–51 Food and Drug Administration (FDA), 69, 82, 84, 190, 559 Foot Locker, 431 Forbes magazine, 219, 283 Ford, Henry, 37, 206 Ford, Lynda, 535 Ford Motor Company, 37, 80, 82, 215–216, 251, 306, 370, 514, 564, 572, 586, 605 Forrester Research, 588 Fortune magazine, 11, 15, 25, 76, 153, 256, 341, 342, 385, 387, 391, 392, 449, 454, 455, 477, 502, 523, 543, 554, 559, 588 Franklin, Hilary, 354 FreemantleMedia, 247–248 Free World Dialup, 81 French or Foe (Platt), 509 Freudenberg-NOK, 592 Friedman, Milton, 118–119 Friedman, Thomas, 238–239 Friedson, Art, 441
Frito-Lay, 435 Fuji, 120 Fuji Photo Film, 250 Fujisawa Pharmaceuticals, 349 Fuji-Xerox, 250 The Functions of the Executive (Barnard), 54–56 Funo, Yuki, 134
G Gagnon, Stephen, 221 Gannett Company, 175–177 Gantt, Henry, 34, 43–44 Gap, 99, 524 Gardner, Grover, 539 Gardner, Howard, 452 Gasaway, Roger, 309 Gates, Bill, 88–89, 272, 281, 282 Gateway, 152 Gee, Tom, 215 GE Global eXchange Services, 317 Genecor, 90 Genentech, 90 General Dynamics, 599 General Electric, 120, 227, 250, 251, 306, 309, 315, 327, 454, 470, 474, 541 General Foods, 85–86 General Mills, 72, 573 General Motors, 4–5, 11, 17, 80, 82, 219, 220, 328, 465, 488, 523, 572, 584, 586, 597, 600 Genesco, 540–541 Gerdau SA, 239 Germano, Peter, 245 Germany Business Traveler, 543 Getting to Yes: Negotiating Agreement without Giving In (Fisher, Ury, and Patton), 50 Giannantonio, Frank, 570 Gilbreth, Frank, 34, 41–42, 44 Gilbreth, Lillian, 34, 41–42, 44 Giller, Peter, 92 Gillette, 103, 185, 512 Giuliano, Louis, 499 GlaxoSmithKline Consumer Healthcare, 296 Goizueta, Roberto, 540 Goldberg, Ray, 531–532 Goldman Sachs, 325 Good Value, 72–73 Goodyear Tire Company, 78 Google, 6, 16, 167, 312, 497, 514 Gore, Bill, 203 Gorman, Rebecca, 5 Goulding, Doug, 545 Graczyk, Bob, 349 Grammer, Neil, 503 Granakis, Huck, 308 Greenberg, Glenn, 86 Green, Darryl, 251 Greenfield, Jerry, 125 Griffith, Scott, 195
Grinstein, Gerald, 17 GTE, 385 Guitar Centers, 218 Gutenberg, Johannes, 59, 206
H H&R Block, 341 Haas, Chris, 214 Haedicke, Ted, 557 Haines, Ray, 405 Hall, Edward, 509 Hall, Mildred, 509 Hamilton Sundstrand, 275 Hamilton, Walter, 283 Hammer, Michael, 221, 291, 292 Hampton Inn, 595, 596 Hampton University, 407 Handy Andy, 177 Hapburg, Richard, 433 Haque, Promod, 252 Harbin Brewery Group, 239 Hardee’s, 69 Harding, Ralph, 465 Hargreaves, James, 37 Harmon Industries, 360 Harris, Ben, 540–541 Hartman, Stephen W., 539 Harvard Business Review, 38 Harvard Business School, 404 Hatch, Jeff, 286 Hauser, Meghan De Goyler, 496 Haze, Paul, 495 HBO, 11, 168 Health Decisions, 558–559 HealthSouth, 100, 474 Healthy Valley, 73 Heil Trailer International, 599 Herman Miller, 296, 540 Hernandez, Joe, 370 Hersey, Paul, 467–469 Hertz, 84, 195 Hewlett-Packard, 13, 14, 80, 152, 325–326, 452, 528–529, 546–547 Hilgert, Ray, 497 Hill, Linda, 21–23 Hindustan Lever, 190 Hinkle, Joe, 84 Hire.com, 350 HNC Software, 513 Hoechst Celanese, 388, 407 Hofstede, Geert, 257 Holiday Inn, 89 Hollenbeck, John, 327 Holmes, Tim, 514 Holzel, Urs, 6 Home Depot, 5, 120, 125, 177, 179, 185, 325, 530 Honda Motors, 124, 238, 251, 584, 586 Honeywell, 513, 590 Hoogezand Sappmeer, 15 Hooters, 342–343 Horgan, Sam, 390 Hosmer, Larue, 110 Hot Dogs & More, 524
684
HotJobs.com, 350 Houck, Elsie, 401 Howe, Carl, 588 Howell, William, 388 HR Magazine, 505 Hukku, Rajesh, 15 The Human Equation (Pfeffer), 24 The Human Problems of an Industrial Civilization (Mayo), 53 The Hunger Site, 122 Hutosky, Jeannie, 73 Hyperspace Communications, 453 Hyundai, 581
I Iacocca, Lee, 143 Iberia, 426–427 IBM, 88, 89, 107, 108, 109, 110–111, 291, 570, 588–589 iComp Index, 206, 207 IGA, 72–73 IKEA, 173, 175 IM Logic, 351 Implicit Association Test (IAT), 406 Inc., 349 Indianapolis Star, 177 Industrial Light & Magic (ILM), 307–308 Industry Week, 307 Infineon Technologies, 241 Infosys Technologies, 238–239 Ingalls, Robert, Jr., 556 Inland Steel, 546 Insurance Institute for Highway Safety, 124 Intel Corporation, 206–208, 253–254, 474, 554 Interactive Excellence (Schlossberg), 210 International Harvester, 37 International Herald Tribune, 176 International Organization for Standardization, 589, 590 International Power PLC, 92 International Steel Group, 239 International Telecommunication Union (ITU), 210 International Telegraph Convention, 210 Internet Explorer, 568 Internet Phone, 80 Intrawest, 526 Iorfida, Diane, 222 Ireland, Ron, 557 iRobot, 525 IRS, 531 Irwin, Doug, 317 ISE Electronics, 533 ITT, 499
Index
J Jacobsen, Michael, 122 Jaguar, 586 Jarvis, Jeff, 497 JCPenney, 388, 523 J. D. Power & Associates, 229, 581, 586 Jeep, 586 Jefferson, Thomas, 57 Jessup, Debra Ragin, 55 JetBlue, 439–440, 485 j-Flex Solutions, 15 J. M. Smucker, 15 Job Accommodation Network, 394, 395 Job Searching Online for Dummies (Dixon), 341 Jobs for Progress, 407 Jobs, Steve, 322 John Deere, 263 Johnson & Johnson, 120–121, 173, 181 Johnson, Doug, 310–311 Johnson, Jim, 386 Johnson, Rahsaan, 9 Jonath, Franklin, 13 Jones, Carla, 464 Jones, Edward, 464 Journal for Quality and Participation, 590 Journal of Applied Psychology, 7, 38 Joyner-Kersee, Jackie, 475 J-Phone, 251 J. P. Morgan Chase, 118, 407
K Kahn, Robert, 212 Kane, Russ, 553 Kashi, 73 Kasten, Thomas, 292 Katzenback, Christopher, 386 Katzenback, Jon, 311 Kazaa.com, 76 Keane, Bill, 223 Keene, Mary, 308 Keith, Kristy, 486 Kelleher, Herb, 93, 450, 594 Kellogg’s, 72–73, 85 Kennedy, John F., 143 Kentucky Fried Chicken, 80, 122 Kerr, Steve, 325 Keyes, Tameron, 346 KFC, 249, 250 Kidder Resources, 395 Kiel, Dana, 498 Kikkoman Corporation, 15 Kimberly-Clark, 194 Kimmel, Allan, 496 King, Jan, 146 King of Prussia Mall, 524 Kinko’s, 191 Kiss, Bow, or Shake Hands (Morrison, et al.), 506 Kitts, Jim, 512 Kmart, 10, 177, 185, 529–530
Knight-Ridder Corporation, 141, 175, 176 Knouf, Craig, 143 Kodak, 119–120 Koehler, Hans, 506 Kogure, Makoto, 136 Kohake, Bedie, 404 Kohlberg, Lawrence, 109 Kotter, John, 223, 224, 225 Kozak, Mark, 437 Kozloff, Barry, 261 Kozlowski, Dennis, 449 KPMG, 100, 316 Kraemer, Harry, 434, 512 Kraft Foods, 15, 70, 172 Krasuna, Amy, 529 Krause, Donna, 369 Kroc, Ray, 91, 135 Kroger, 415 Kuczynsky, John, 531 Kung, Cee, 263 Kunitiz, Matt, 213 Kwik-Fit Financial Services, 465
L La Barbera, Priscilla, 77 Lacy, Alan, 477 Lafley, A. G., 184, 222, 224, 502, 512 Lamstein, Aaron, 125 Landale, Marjorie, 416–417, 422–423 Land Rover, 586 Lands’ End, 543, 570 Larkin, Hank, 102 Laskawy, Phil, 512 Lauzon, Amand, 227 Lawler, Steve, 296 Lee, Darcy, 203 Lee, Tim, 328 Leggett & Platt Machine Products, 599 Leno, Jay, 69, 581 Leonard, Stew, 542 Levine, Joshua, 219 Levi-Strauss & Company, 118, 247, 292, 311–312 Lewin, Kurt, 220, 221 Lewis, Tom, 530 Lexus, 124, 464, 525, 554, 586 Lincoln, 586 Ling, Luo Bing, 250 Linton, Michael, 85 Liz Claiborne, 247, 297 Locke, Edwin, 41, 138 Lockheed Martin, 114–115 Lofy, Annmarie, 431 Longaberger Company, 307 Long John Silvers, 249 Longo, Randy, 261 Lopez, Jacqui, 308 L’Oreal, 406 Los Angeles Times, 176 Losey, Michael, 295 Lowe’s, 179, 185 Loyalty Institute, 422
Lubrano, Al, 347 Luby’s, 192 Lucas, George, 307–308 Lucent, 10 Lufthansa, 582 Luter, Joseph, 531–532 Lynch, Vinya, 499
M M&Ms, 88 Magnetics International, 546 Mail Boxes Etc., 191 Mainstream, 395 Malden Mills, 124 Mancini, Joe, Jr., 457 Mangiardi, John, 209 Marconi, Guglielmo, 212 Market6, 604 Markovitz, Michael, 497 Mark, Reuben, 475 Marlow Industries, 374 Marriott Marquis Hotel, 406 Marshall Fields, 431 Marshal Medical Center, 525 MARS Music, 218–219 Martens, Phil, 216 Martin, Donna, 91 Martinez, Francisco, 246–247 Martin, José, 350 Maslow, Abraham, 419 Massachusetts Institute of Technology, 139 Massar, Tanno, 528 Massey Energy, 368–369 Mattel, 122, 138, 510–511 Maxtor, 596 Maybach, Wilhelm, 212 Mayer, Marissa, 514 Mayo, Elton, 34, 51, 53–54 Mayrose, Phil, 422 Maysteel, 570 Maytag, 312, 596 Mazda, 586 McClelland, David, 419 McDonald’s, 69, 80, 91, 135, 191, 192–193, 194, 244–245, 249, 250, 284, 285, 287, 524, 542, 583 McElaney, Phyllis, 123 McFadzen, Karen, 477 McGee, Tom, 407 MCI, 10, 102, 185 McKay Nursery, 370 McKee, Keith, 327 Medici family, 60 Medtronic, 421, 477 Meliones, Jon, 536 Melting Pot restaurant, 12 Menard, John, 179 Menards, 177, 179, 185 Mercedes, 464, 525, 526, 554 Merck & Co., 142–143 Merck-Medco, 188 Mercury, 586 Metropolitan Life Insurance, 561 Meyer, Herbert, 367 Meyers, Gary, 188
Index
Miami Heat, 141 Miami Herald, 175 Michigan Summit Polymers, 229 Microsoft, 16, 71, 89, 109, 167, 168, 191, 210, 217, 272, 281, 282, 295–296, 311, 526 Midmark Medical Equipment, 590 Midvale Steel Company, 39–41 Miller, Kathleen, 90 Miller, Ray, 218 Mills, Peter, 325 Milwaukee Mutual Insurance, 329 Minnesota Clerical Test, 354–355 Mintzberg, Henry, 14, 15, 16, 136 Mitsubishi Electric, 250 Mixon, Malachi, 180 Mobil Travel Guide, 178 Mohrman, Monty, 329 Monahon, Bonnie, 125 Monarch Marketing Systems, 226–227 Monge, Gaspard, 58 Monsanto, 433 Monster.com, 350, 351, 496 Moody, Steve, 5 Moore, Gordon, 554 Moore, Laura, 295 Moore, Norman, 539 Morgan Stanley, 297, 343 Morris Air, 485 Morrison, Terri, 506 Mossberg, Walter, 171 Motel 6, 89 Motorola, 167, 449 Mouton, J. S., 458–459 MSN, 168, 169–170, 171, 272–273, 315 MTV International, 237 Much, John, 513 Mulcahy, Anne, 8, 455, 457, 478 Murthy, Aasha, 126 Musschenbroek, Pieter van, 212 Myers, Stacy, 328 Mystery Shoppers Providers Association, 525–526
N Nagel, David, 8 Nagra, Pardeep Singh, 403 NAPA (National Automotive Parts Association), 305 Napster, 210 Nardelli, Bob, 325 NASA, 154, 512–513 National Amputation Foundation, 395 National Association for the Deaf, 395 National Basketball Association, 141 National Business Ethics Survey, 115
685
National Cash Register (NCR), 208 National Center for Employee Ownership, 370 National Council on Disability, 395 National Federation of the Blind, 395 National Football League, 487 National Institute for Occupational Safety and Health, 104 National Institute of Aging, 401 National Institute of Standards and Technology, 590, 591 National Labor Relations Board (NLRB), 84, 344 National Rehabilitation Information Center, 395 National Transportation Safety Board, 328 Natural Ovens, 70–71 Navistar, 104 Navran, Frank, 531 NBC, 80, 213 Neeleman, David, 440, 485 Neff, Thomas, 122 Nestlé, 15 Netscape, 568 NetZero, 170 Neuchtern, Martin, 222 New Jersey Bell Telephone, 56 Newscom, 176–177 Newsday, 176 Newsquest plc, 176 New York Presbyterian Health System, 222 New York Times, 176, 238 New York Times Company, 175, 176 Nextel Communications, 185 Niagara Mohawk, 560 Nichol, Dave, 541 Nickel, Tony, 298–299 Nickerson, Barry, 374 Nicol, Ron, 375 Nike, 247 Nilekani, Nandan, 238–239 Nissan, 584, 586 Nordstrom, 532–533 Nortel Networks, 112, 114, 116, 155, 511–512 Northrup Grumman, 116 Nucor Steel, 318, 324
O Oba, Hajime, 229 Occupational Safety and Health Administration (OSHA), 84, 341, 344 O’Day, Pat, 316 Office Depot, 81, 218 Office of Consumer Affairs, 541 Office of Personnel Management, 345 Ofot, 120 Ohio State University, 457, 458
Oldman, Mark, 497 Old Navy, 99, 529 Oldsmobile Motor Works, 58 O’Leary, Michael, 17 Olsen, Howard, 20 Omega Engineering, 103 O’Neill, Brian, 124 Optimum Online, 171 Oracle, 116 Original Party Box, 78 Orlando Sentinel, 176 Orpheus chamber orchestra, 308 Orr, Dominic, 155 Osco Drugs, 563 Osram Sylvania, 494 Otis, 275, 276
P Pabst, 133 Pacific Enterprises, 388, 405 Paden, Danielle, 362 Palma-Nidel, Susan, 308 Palm, Inc., 8 Parker, Peter, 51 Patel, Manoj, 190 Patterson, Neal, 501–502 Patton, Bruce, 50 PC Magazine, 148, 151, 169, 170, 171, 174 P. Diddy, 315 Peabody Hotel, 397 Pelaez, Roy, 478 Pentagon, 72 People, 11 PeoplePC, 170 PepsiCo, 80, 248–249 Personnel Management magazine, 390 PETA (People for the Ethical Treatment of Animals), 83–84, 117 Peterson, Douglas, 508 Peto, Richard, 7 Pfeffer, Jeffrey, 24 PGP (Pretty Good Privacy), 567–568 Philadelphia Inquirer, 175 Philip Morris, 145 Phillips Foods, 245 Phones4U, 528 Physio-Control, 587 Pinette, John, 296 Pinto, Ian, 350 Pitney-Bowes, 558 Pivot International, 99 Pizza Hut, 249 PlanetFeedback.com, 514 Platt, Polly, 509 PlayDoh, 598 pLotdev Multimedia Developers LLC, 315 Polaroid, 10 Polo Ralph Lauren, 247 Pony Express, 60, 209 Porter, Michael, 186–187, 188, 191
Portland General Electric, 112, 114 Post, 72, 85–86 Potter, Neil, 102 Potton, Andy, 426 Powerex, 250 Prather, Sheryl, 495 Pratt & Whitney, 275, 276, 570–571 President’s Choice, 541 Pressman, Bob, 219 Pressman, Gene, 219 Price, Steve, 340 PriceWaterhouseCoopers, 428 Prince, Charles, 508 Procter & Gamble, 15, 103, 117, 118, 183–184, 185, 190, 222, 224, 296, 306, 502, 512, 514 Prodigy, 169 PRS Group, 256 Prudential Relocation Management, 261 Puckett, John, 323 Pullman Company, 37 Pulver.com, 81 Pulver, Jeff, 81
Q Quantum Corporation, 587 Quick Chek Food Stores, 349 Quinn, Feargal, 502
R Radio Shack, 295, 427 Rafferty, Mark, 93 Rahmat, Mohd, 494 Rajala, Janne, 424 Ramsay, Mike, 167 Ranbaxy Laboratories, 190 Ratcliffe, Thomas, 474 Rawitsch, Jim, 251 Raymundo, Tony, 339–340 Red Lobster, 191 Reebok, 247 Reengineering the Corporation (Hammer and Champy), 291 Rembrandt House Art Gallery, 15 Rent-A-Center, 345 Replay TV, 167 Reuters, 16, 350 Reva, 587 Reynolds, Beverly, 309 Richards, Joel, 531 Ricks, David, 260 Ricoh, 80 Ringleman, 309–310 The Rise and Fall of the House of Barneys (Levine), 219 Rise, Mark, 421 Ritz-Carlton, 314 Roach, Stephen, 297 Roadrunner, 171 Robinson, Marty, 558 Rodgers, T. J., 399
686
Rollins, Kevin, 451 Rollnick, William, 122 Rosner, Bob, 497 Ross, Gary, 441 Route One, 572 Royal Commission on London Traffic, 553 Royal Dutch Shell, 344 Rubbermaid, 597 Ruby Tuesday, 69 Ruddy, Tom, 318 Ryanair, 17, 582 Ryan, Tom, 594 Rytsola, Jaako, 424
S Safeway, 415 Saladworks, 524 Salvation Army, 123 Salzman, Marian, 122 Sam’s Club, 529–530 Samsung Corporation, 181 San Antonio Spurs, 141 Sanders, Colonel, 122 Sandhu, Arvinder Singh, 403 Sanofi-Aventis, 256 SaraLee, 274 SAS, 88 SasolChevron, 250 Saunders, Mark, 296 Savage, Randy, 309 Savastano, Paul, 555 SBC Center, 141 SBC Communications, 20, 167, 168, 183, 185, 375, 388 SBC-Yahoo, 170, 171 Scarlett, Joe, 213 Schaefer, Barbara, 339 Schlage Lock Company, 143 Schlossberg, Edwin, 210 Schmitz, Kelly, 572 Schneider, Steve, 226 Scholastic Aptitude Test (SAT), 354 Scholastic Press, 604 Schrader, Bob, 314 Schrage, Michael, 292–293 Schroeger, Jennifer, 423 Schroer, James, 85 Schwind, Jenet Noriega, 504 Scientific-Atlanta, 167 Scott, Lee, 457–458 Scrushy, Richard, 474 Sears, 477, 529–530, 545, 606 Sears, Brian, 115 Sears Robuck, 120–121, 185 Second Chance Body Armor, 123–124 Securities and Exchange Commission (SEC), 84, 427, 449 Selby, James, 221 Selection Research International, 261 Selfridge, Harry Gordon, 595 Selfridge’s, 595 Senackerib, Mike, 70
Index
Sesame Street, 70 7-Eleven, 13 Severn Sound, 138 Shanghai Semiconductor Manufacturing International, 254 Shartzer, Sandi, 314 Sheffield, Gary, 475 Sherwin-Williams, 596 Shim, Jae K., 146, 539 Shuster, Stephen, 203 Siegel, Joel G., 146, 539 Siemens, 494 Sigma-Aldrich, 295 Sigma Tel, 297 Sihler, Vickey, 524 Sikorsky, 275, 276 Simon, Jeremy, 11–12 Simons, Mark, 597–598 Simplest-shop.com, 569 SimuLearn, 362 Sinegal, Jim, 189 Singapore International Airlines (SIA), 543 Singh, Amric, 403 Sistla, Vamsi, 167 Slaughter, Steve, 599 Sloan Management Review, 38 Sloans Lake Managed Care, 562 SmartMoney, 176 Smith, Anne Shen, 388 Smithfield Foods, 531–532 Smith, Jack, 488 SmithKline, 404 Smith, Richard, 85 Smucker, Richard, 15 Smucker, Tim, 15 Snapple, 80 Sneed, Mark, 245 Society for Human Resource Management, 294, 295, 354, 390 Society of Industrial Engineers, 42 Software & Information Industry Association, 110 Sonnenschein, Nath & Rosenthal, 568 Sony Corporation, 9, 71, 136, 191, 244, 274, 297 Sorenson, Keld, 295 Sorino, Fred, 513–514 Southwest Airlines, 11, 93, 450, 454, 485, 536, 582, 594 Southwestern Bell, 86 Spencer Stuart, 388 Spinmaster, 214 Sportime International, 213–214 Sprint, 86, 185, 276, 341, 555 Spurlock, Morgan, 69 Stahle, Phyllis, 595 Stainton, David, 222–223 Stalker, G. M., 287 Standard & Poor’s, 124–125, 591 Standard Motor Products, 305 Staples, 84
Starbucks Coffee, 125–126, 195, 337 Start, Chris, 222 State Farm Insurance, 563 Stephens, Martin, 117 Stern Stewart Performance 1000 index, 541 Stew Leonard’s, 542 STI Knowledge, 340–341 Stitt, Paul, 71 Stoll, Jennifer, 172 Strategic Management Journal, 7, 38 Stroh’s, 133 Stuart, Spencer, 122 Stum, David, 422 Subaru, 185 Subway, 69, 193, 250, 501, 524 Sun Microsystems, 295–296 Sun Tzu, 36 Superior Industries International, 82 Superquinn, 502 Super Size Me, 69 Suzuki, 586 Swenson, Winn, 100
T Taco Bell, 69, 80, 249 Tallahassee Furniture Company, 353 Target, 87, 123, 125, 189 Taylor, Andy, 514, 591 Taylor, Frederick, 34, 39–41, 44 Taylor, Tom, 595 Techies.com, 351 Technical Materials, 347 Technology Professionals Corp (TPC), 422 Tempest, Brian, 190 Terrell, Karenann, 217 Texaco, 344, 387 Texas Industries, 346 Textron, 118 “The Engineer as Economist” (Towne), 38 Thiokol, Morton, 154 Thomas, Dave, 404 Thompson, John, 475 3M, 181, 184, 190, 545, 603 Timberland, 125 Time, 11 Time Warner, 11, 167, 168 Timex, 238 Timmons, Holly, 263 Tindell, Kip, 189 TiVo, 167 Toshiba, 251, 597–598 Tower Records, 115, 394 Towne, Henry, 38 Towne Manufacturing Company, 38 Toyota, 82, 134, 218, 229, 385, 488, 572, 584, 586, 605, 606 TPG, 528 Tractor Supply Company, 213
Tracy, John A., 539 Traffic Systems Group (Portmouth, England), 557 Travel and Leisure, 543 Travelocity.com, 564 Tribune Company, 175, 176 Trimmer, Tiberio, 352 Troy State University, 474 TrueSwitch, 171 Truman, Harry, 531 Trump Hotel & Casino Resorts, 204 Turner Broadcasting, 11 TWA, 563–564 Tyco, 100, 449
U Uioreanu, Calin, 569 Umber, Dave, 185 Uminger, Glenn, 606 Underwood, Richard, 145 Unger, Tom, 118 Unilever, 280, 281 Union Pacific Corporation, 339 United Airlines, 11, 72, 497 United Auto Workers, 308 United Parcel Service (UPS), 5, 191, 423 United Technologies, 275–276 University of Illinois, 557–558, 560 University of Michigan, 337, 457, 458 University of Texas, 457, 458, 495 Urban, Tammy, 320 Ury, William, 50 USAA, 595 U.S. Air Force, 355 U.S. Airways, 11, 72 U.S. Army, 20 USA Today, 167, 176 U.S. Bancorp, 221 U.S. Census Bureau, 384, 394 U.S. Chamber of Commerce Business Confidence Index, 76 U.S. Customs Service, 241 U.S. Department of Agriculture, 82 U.S. Department of Commerce, 388 U.S. Humane Society, 117 U.S. Navy, 599 U.S. Peace Corps, 261 U.S. Postal Service, 330, 394 U.S. Steel, 81 U.S. Supreme Court, 390 UTC Power, 275
V Valassis, 592 Valley News Dispatch, 154 Vanguard, 542 VanWambeke, Gary, 592 Verizon, 167, 168, 170, 183, 185, 191, 556
Index
Verizon Communications, 385 Victoria’s Secret, 563 Vignette Corporation, 153 Vivendi, 10 Voca Corporation, 354 Vodafone, 251 Volvo, 124, 173
W Wachs, Karl, 559 Waffle House, 427 Wagoner, Rick, 11 Walgreen, Charles, III, 474 Walgreen’s, 119–120, 185, 473–474, 523 Wall Street Journal, 6, 7, 16, 171, 172, 176, 399, 452, 475, 525, 526 Wal-Mart, 12, 73, 87, 88, 89, 123, 125, 185, 188, 189, 238, 243–244, 245, 246–247, 383, 384, 415, 427, 457–458, 465, 523, 529–530, 557, 563, 564, 572, 593
687
Walt Disney Company, 143, 222–223, 320, 417, 435 Walton, Rob, 383 Walton, Sam, 88, 89, 457 Warner Brothers, 11 Warner-Lambert, 404 Warner Muscia Group, 173 Wass, Carla, 423 Watson, Dave, 76 Watson, Thomas J., 88, 89 Weber, Max, 34, 45–46, 474, 530 Web Phone, 80 Wegmans, 415 Weidman, Tim, 496 Weill, Sandy, 526 Weimerskirch, Arnold, 590 Weinberg, Larry, 89 Weiss, Bill, 103 Weiss, Jake, 386 Wells Fargo, 118 Wendy’s, 9, 69, 80, 192, 583 Western Electric Company, 51, 53–54 Weyerhauser, 73
Wharton, Joseph, 38 Whirlpool, 189 Whitney, Eli, 57 Whittle, Sir Frank, 212 Whole Foods, 307, 308 Wieser, Brian, 167 Williams, Duane, 315 Williams, Mona, 529 Wilson, Heather, 214 Wilton Connor Packaging, Inc., 418 Winphoria Networks, 252 Winterkorn, Martin, 464 The Wisdom of Teams (Katzenback), 311 W. L. Gore Company, 203 Wong, Mary, 296 Woodhouse, Kathleen, 340 WorldCom, 4, 102, 511 World Trade Center, 72 Worldwise, 125 Woznick, Charles, 555 Wright, Mary Ann, 216 Wuouma, Erkki, 424 Wyatt Company, 497
X XEL Communications, 14, 323, 329–330 Xerox Corporation, 8, 10, 80, 167, 250, 318, 455, 457, 478 Xoceco, 188
Y Yahoo, 271 Yamaha, 606 Yellow Book, 183 Yellow Corporation, 510 Yeros, John, 453 Yuengling, Dick, 133 Yum! Brands, 80, 249
Z Zantaz.com, 504 Zipcar, 195 Zollars, Bill, 510
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subject index A Ability, 417 perceived, 466 Above-market wages, 369–370 Absenteeism, 290 Absolute comparisons, 149 Accommodative strategy, 124 Achievement-oriented leadership, 465 Acquaintance time, 509–510 Acquisition costs, 559 Acquisitions external growth through, 174 portfolio strategy and, 181 Action plans, 138–139 Active listening, 502–503 Adaptability screening, 261, 263 Adaptive strategies, 189–191 Address terms, 507–508 Administrative management, 46–49 Adverse impact, 345 Advocacy groups, 83–84 Affective conflict, 155, 321 Affective cultures, 506–507 Affectivity, 401 Affirmative action defined, 385 differences between diversity and, 385–387 programs, purpose of, 386 African Americans discrimination lawsuits brought by, 385 in management, 392 purchasing power of, 388 statistics regarding, 384 turnover rates for, 387 Age discrimination, 390–391 Age Discrimination in Employment Act (1967), 344 Aggression, personal, 104 Agreeableness, 397 AIDS, 125, 126 Airline industry changes in, 71–72 deregulation of, 485 effect of September 11, 2001 attacks on, 11, 72 holding cost for, 603 productivity in, 582 use of e-tickets by, 573 Albemarle Paper Co. v. Moody, 349 Americans with Disabilities Act (ADA), 42, 344, 394
Analyzers, 190 APEC (Asia-Pacific Economic Cooperation), 244 Application forms, 352 Appointment time, 509 Aptitude tests, 354 ASCII text, 562 ASEAN (Association of Southeast Asian Nations) 244 Asian Americans in management, 393 purchasing power of, 388 statistics regarding, 384 Asia-Pacific Economic Cooperation (APEC), 244 Assemble-to-order operations, 597 Assembly lines, 37 Assessment centers, 356, 358 Assistive technology, 395 Association/affinity patterns, 563 Associational incentives, 55 Association of Southeast Asian Nations (ASEAN), 244 Assurance, 588 Attack, 193, 194 Attention, 487, 488 Attribution errors, fundamental, 489–490 Attribution theory, 489–490 A-type conflict, 155, 321 Authentication, 566 Authoritarianism, 399 Authority. See also Organizational authority acceptance of managerial, 56 centralization of, 283 cooperation and acceptance of, 54–56 danger of autonomy, power, and, 55 decentralization of, 283 defined, 280 delegation of, 282–283 inherent in management positions, 101 line, 281 staff, 281 system, formal, 466 vested in positions, 45–46 Authorization, 566 Automobile industry inventory in, 600, 602–603 productivity in, 584 quality in, 586–587
Autonomy of entrepreneurial firms, 196 job, 287 need for checks, balances, and controls on, 55 satisfaction caused by, 289 in teams, 313–315 work group, 533 Average aggregate inventory, 601 Avoidance learning, 434–435 Avoidance strategy, 256 Awareness training, 406
B Baby boomers, aging of, 384, 391 Background checks, 353–354 Balanced scoreboard advantages of, 536 approach to control, 535–547 basic parts of, 536–537 customer perspective, 541–542 financial perspective, 537, 539–541 innovation and learning perspective, 543–547 internal perspective, 542–543 Balance sheets, 537, 539 Baldrige National Quality Award, 590–591 Bar codes, 562 Bargaining power, 188 Batch production, 599 BCG matrix, 181–183 Behavioral addition, 92 Behavioral formality, 293 Behavioral informality, 293–296 Behavioral observation scales (BOSs), 366 Behavioral substitution, 92 Behaviors adapting leader: path-goal theory, 463–467 attribution theory and, 489–490 consideration, 457–459 control of, 531 ethical, 101, 115–117 of ethical and unethical charismatics, 476 influencing employee, 102 leadership, 457 nonproductive, 531 Benchmarking, 175 other companies, 525 test for measuring relative computer speed, 206–207 689
690
Best guess forecasting, 340 Bias defensive, 489 self-serving, 490–491 Biographical data (biodata), 355 Biometrics, 567 Blogs, 497, 513 defined, 514 external, 514 Bona fide occupational qualification (BFOQ), 343 Bounded rationality, 151 Boycott, product, 84 Brainstorming, 158–160 Budgeting, 146 Budgets, 146, 537, 539 common kinds of, 539 Build-to-stock operations, 597 Bureaucracy defined, 45 elements characterizing, 45 government, 530–531 Bureaucratic control, 530–531, 533 Bureaucratic immunity, 326 Bureaucratic management, 45–46, 530 Business confidence indices, 76 Buyer dependence, 82 Buyers, bargaining power of, 188
C CAD (computer-aided design), 58 CAFE (Corporate Average Fuel Economy) regulations, 82 Cafeteria benefit plans, 371–372 CAFTA (Central American Free Trade Agreement), 244 CAM (computer-aided manufacturing), 58 Capacity planning, 57 Career path, 350 Carrying cost, 603 Cash cows, in portfolio strategy, 182, 183 Cash flow analysis, 537, 539 Casual dress policies, 294–295 Central American Free Trade Agreement (CAFTA), 244 Centralization of authority, 283 Central tendency error, 365 Chain of command, 281 Change. See also Organizational change agent, 228–229 discontinuous, 209 forces, 220 generational, 217 incremental, 211 intervention, 221 low tolerance for, 221 organizational culture and, 225–226 in organizational work setting, 230 resistance to, 221 results-driven, 226–227
Index
threatening aspects of, 224–225 Change agent, 228–229 Change forces, 220 Change intervention, 221 Character of the rivalry, 187 Charisma, 456 Charismatic leadership, 456, 474–477 Cheating, college, 112 Chief executive officers (CEOs), 10 Chief financial officers (CFOs), 10 Chief information officers (CIOs), 10 Chief marketing officers (CMOs), 85 Chief operating officers (COOs), 10 Civil Rights Act, 78 1964 (Title VII), 343, 344, 385–386, 392 1991, 344 Clean Air Act (1990), 122 Client relationship, establishing, 288 Closed systems, 60 Closure, 488–489 Cluster chain, 495, 496 Coaching, 497 Codes of ethics, 112, 113, 114 Coercion, 223 Cognitive abilities, 455 Cognitive ability tests, 355, 358 Cognitive conflict, 154–155, 321 Cognitive maps, 86–87, 87 Cohesiveness, 318–320 team performance and, 319 using humor to build, 322 Collectivists, 326 Commissions, 370 Communication. See also Feedback of change-related information, 222 cost, of information transmittal, 560 defined, 486, 491 downward, 493–494 employee, through email and voice mail, 16 horizontal, 494 improving, 500–510 interpersonal, 492 kinds of, 491–499 managing organization-wide, 510–514 medium, choosing right, 500–502 methods of electronic, 510–512 nonverbal, 498–499 one-on-one, 497–498, 500–510 oral, 500–501 perception and, 486–487
process, 491–493 upward, 494 written, 501–502 Communication channels, 491–492 formal, 493–494 informal, 495–497 Company hotlines, 513 Company vision, 90–91 Compensation decisions regarding, 369–371 defined, 369 employment benefits as, 371–372 linked to performance, 376 productivity and, 583 team, 329–330 Competition design, 209–210 direct, 191–193 Competitive advantage, 168–169, 208 creating temporary, 169 ethics as source of, 173 sustainable, 169 sustaining, with information technology, 556–557 through people, 24–26 Competitive aggressiveness, of entrepreneurial firms, 196 Competitive analysis, 80–81 Competitive inertia, 172 Competitors, 80–81 Complex environments, 72–73 Complex matrix, 280 Component parts inventories, 600 Compounded annual growth (CAGR), 536 Compressed pay structures, 371 Compression approach to innovation, 216–218 goals of, 216 Compromise, 50 Computer-aided design (CAD), 217 Computer(s) -aided design (CAD), 58 -aided manufacturing (CAM), 58 benchmarking, for measuring relative speed of, 206–207 business information managed on, 554 disposal program for, 546–547 removing games from employee's, 531 viruses, 567 Concentration of effect, 109 Conceptual skills, 19 Concertive control, 533 Concurrent control, 527 Conduit metaphor, 493 Confidentiality, 499 employee termination and, 373–374 Conflict A-type, 155, 321
constructive, 49–51 C-type, 154–155, 321 integrative approach to, 50 team, 321–322 Conflict resolution, 50 skills, 328 Conflicts of interest, avoiding, 83 Congressional Accountability Act, 148 Conscientiousness, 397, 398 Consideration, 457–459 Consistent organizational cultures, 91 Constructive feedback, 504 Consumers, effect of free trade agreements on, 244–245 Contingency management, 62 Contingency theory, 460–463 assumptions of, 460 leadership style in, 460–463 matching leadership styles to situations in, 462–463 situational favorableness, 461–462 Continuous-flow production, 598 Continuous improvement, 591–592 Continuous reinforcement schedules, 435 Control, 8–9 balanced scoreboard approach to, 535–547 behavior, 531 budgets, cash flows, and economic value added (EVA), 537–541 bureaucratic, 46, 530–531, 533 concertive, 533 concurrent, 527 of customer defections, 541–542 decisions regarding areas of, 534–535 defined, 524 feedback, 527 feedforward, 527 how and what to, 529–530 loss, 528 normative, 532–533 objective, 531–532 output, 531–532 as political risk reduction strategy, 256 of quality, 542–543 unintended consequences of increased, 528–529 of waste and pollution, 543–547 Control methods bureaucratic control, 530–531 concertive control, 533 concurrent control, 527 feedback control, 527 feedforward control, 527 normative control, 532–533 objective control, 531–532
Index
self-control, 534 use of, 535 Control process comparing actual performance to performance standards, 525–526 as continuous, dynamic, cybernetic process, 526–527 setting standards, 524–525 taking corrective action, 526 Conventional level of moral development, 109–110 Cooperation and acceptance of authority, 54–56 as political risk reduction strategy, 256 Cooperative contracts, 248 Coordination, 49–51 Core capabilities, 174–175 Core firms, 175 Corporate-level strategy, 180–186 grand strategies, 184–186 portfolio strategy, 180–184 Corporate portals, 570–571 Corporate talk shows, 511–512 Cost-benefit analysis, 57 Cost leadership, 188–189 Costs acquisition, 559 communication, 560 of maintaining inventory, 603–604 processing, 559 retrieval, 560 storage, 559–560 Cottage industries, 37 Counseling, 498 Creative work environments, 212 Creativity, 212 encouraging and discouraging, 213–214 Cross-cultural communication. See also Cultural differences affective cultures and, 506–507 improving, 505–510 monochronic cultures and, 508–509 neutral cultures and, 506–507 polychronic cultures and, 508–509 Cross-cultural training, 260–261 benefits of, 262 Cross-functional teams, 315 Cross training, 308, 329 C-type conflict, 154–155, 321 Cultural differences. See also Cross-cultural communication address terms and, 507–508 attitudes toward time and, 509 becoming aware of, 257–259 individualism, 258 language and cross-cultural training, 260–261 masculinity and femininity, 258
691
perception and, 505–506 power distance, 257–258 related to employment laws, 352 short-term/long-term orientation, 258 uncertainty avoidance, 258 Cultural simulation, 261 Customer defections, 542 Customer departmentalization, 276–277 Customer focus, 591 Customers customer departmentalization, 276–277 proactive monitoring of, 80 reactive monitoring of, 79–80 sharing of data with, 573 Customer satisfaction defined, 591 ISO certification and increase in, 589–590 link between loyalty, profits, and, 595 managers and, 25–26 surveys, misleading aspects of, 541–542 using teams to increase, 306 Customization, 599 Customs classification, 241 Cybernetic feasibility, 528, 529 Cybernetic process, control as, 526–527
D Data, 555. See also Information authentication and authorization, 566–567 electronic storage of, 562 encryption, 567–568 protection of, 561 represented on bar codes, 562 security threats to, 565–566 storage, 559–560 use of Web services to transfer, 572 Databases, 559 Data clusters, 564 Data mining, 563 affordability of, 564 Data warehouses, 559, 563 Decentralization, 283 Decisional roles, 16–17 Decision criteria, 148 Decision making. See also Ethical decision making; Rational decision making defined, 147 disadvantages of group, 310 need for fair processes of, 428–429 normative decision theory and, 469–472 using groups to improve, 153–160. See also Group decision making Decision support systems (DSSs), 341, 573–574
Decoding, 492 Deep-level diversity defined, 389 examples of, 396 Defamation suits, 78 Defenders, 189–190 Defensive bias, 489 fundamental attribution error and, 490 Defensive strategy, 123–124 De-forming, 323–324 Delegation of authority, 282–283 Delphi technique, 156–158 Demographics, changing, 77–78 De-norming, 323–324 Departmentalization, 274 customer, 276–277 functional, 274–275 geographic, 277–278 matrix, 278–280 product, 275–276 Dependent demand systems, 606 Design computer-aided (CAD), 58 for disassembly, 545–546 job, 284–288 Design competition, 209–210 Design iteration, 214–215 De-storming, 323–324 Destructive feedback, 504 Devil’s advocacy, 155, 157 Dialectical inquiry, 155–156, 157 Differentiation, 189 Direct competition, 191–193 strategic moves of, 193–194 Direct foreign investment, 239–240 Directive leadership, 464 Direct managerial input forecasting, 340 Disabilities defined, 394 workplace accommodations for, 394–395 Disability discrimination, 394–395 Discontinuous change, 209 managing innovation during, 214–216 Discretionary responsibilities, 122 Discrimination age, 390–391 charges of gender-based, 342–343 employment, 345, 383 employment laws and, 361–362 ethnic, 392–394 gender, 391–392 intentional, 345 lawsuits, 383, 385, 387, 393 against people with disabilities, 394–395 racial, 385, 392–394 unintentional, 345 against women, 383 Discussion time, 509 Disparate treatment, 345
Disposition, 396 Disseminator role, 16 Distal goals, 139–140 Distinctive competence, 174, 208 Distributive justice, 428–429 Disturbance handler role, 17 Diversification, 180 related, 183 unrelated, 181 Diversity audits, 407 deep-level, 389, 396 defined, 384 differences between affirmative action and, 385–387 global business and, 257–259 as good business sense, 387–389 individual differences and, 389 managing, 402–407 in organizations, 384–385 pairing, 407 paradigms, 402–405 principles, 405, 405–406 programs, purpose of, 386 surface-level, 389–396 team, 327 training and practice, 406–407 workplace, 384 Diversity audits, 407 Diversity pairing, 407 Documentary training, 260 Dogs, in portfolio strategy, 182, 183 Dominance, 456 Dominant design, 210 Domination, 50 Downsizing, 374µ Downtime, 603 Downward communication, 493–494 Dress policies, 294–295 Drive, 455 Durability, 587 Dynamic environment, 71 Dysfunctional turnover, 376
E EAP (employee assistance program), 498 Early retirement incentive programs (ERIPs), 374–375 Earth Day, 126 Economic order quantity (EOQ), 605, 606 Economic performance, social responsibility and, 124–126 Economic responsibility, 122 Economic value added (EVA) calculating, 540 description of, 539–540 importance of, 540–541 Economy, general environment and, 75–76 EDI (electronic data interchange), 571-572, 603 EEOC (Equal Employment Opportunity Commission), 342, 343, 345–347
692
Effectiveness, 5 Efficiency, 5 increasing, 583 lost, 603 Effort decreasing or withholding, 426–427 expectancy and, 430 perceived relationship between performance and, 430 performance and, 417–418 EIS (executive information system), 570 E-learning, 362–364 Electronic brainstorming, 158–160 computer screen during, 160 typical layout for, 159 Electronic data interchange (EDI), 571–572, 603 difference between Web services and, 572 Electronic scanners, 562 Email accessibility of, 501 employee communication using, 16 role of, in organization-wide communication, 510–511 Emotional distress suits, 78 Emotional stability, 397, 455 Empathetic listening, 503–504 Empathy, 588 Employee Assistance Programs (EAPs), 498 Employee involvement teams, 307, 314 Employee Polygraph Protection Act, 355 Employees achieving credibility with, 115 educating, about need for change, 222 empowering, 432 influencing behavior of, 102 selecting and hiring ethical, 112 service capability and, 594–595 theft of company merchandise by, 103 use of outplacement services for laid-off, 374 Web surfing by, 145 Employee satisfaction, 594 Employee selection, 351–352. See also Recruitment application forms and résumés for, 352 defined, 352 references and background checks, 353–354 tests for, 354–357 Employee separations defined, 372 by downsizing, 374 due to turnover, 375–376 by termination, 373–374
Index
through retirement, 374–375 Employee shrinkage, 103 Employee stock ownership plans (ESOPs), 370 Employee turnover, 375–376 Employment benefits, 371–372 Employment legislation, 342–343 adverse impact and employment discrimination pertaining to, 345 application forms, résumés, and, 352 cultural differences and, 352 federal, 343–344 general effect of, 406 sexual harassment and, 345–346 Web sites, 344 Employment references, 353–354 Empowering workers, 292–293 Empowerment, 432 defined, 293 of service employees, 596 service recovery and, 595–596 Encoding, 491–492 Encouragement, 213 Encryption, data, 567–568 SSL, 568 Entrepreneurial orientation, 196 Entrepreneur role, 16–17 Entrepreneurship, 195 Entropy, 61 Environmental change, 70 Environmental complexity, 72–73 Environmental scanning, 85–86 in situational analysis, 175 Environments acting on threats and opportunities in, 86–87 changing, 70–74 dynamic, 71 external, 70–74 factors in interpreting, 86 general, 61, 74–79 internal, 88 making sense of changing, 85–88 specific, 75 stable, 70–71 use of environmental scanning, 85–86 Equal Employment Opportunity Commission (EEOC), 342, 343, 345–347 Equal Pay Act (1963), 344 Equity theory, 424–429 components of, 424–425 defined, 424 motivating with, 427–429 reactions to perceived inequity and, 425–427 ERG Theory (Alderfer), 419 ERIP (early retirement incentive program), 374–375 ESOP (employee stock owership program), 370 Ethical behavior climate for, 115–117
competitive advantage of, 173 defined, 101 U.S. Sentencing Guidelines for Organizations and, 104–107 workplace deviance and, 102–104 Ethical charismatics, 475 behaviors of, 476 Ethical decision making, 107–108. See also Decision making basic model of, 116 influences on, 108–110 moral development stage of, 109–110 practical steps to, 112, 114 principles of, 110–111 process for, 151 use of games to practice, 114–115 Ethical intensity, 108–109 Ethical responsibility, 122 Ethics codes of, 112, 113, 114 defined, 100 managers and standards of, 11 nature of management jobs and, 101–102 as source of competitive advantage, 173 training programs, 114–115 travel expense reports and, 531 violations, reporting potential, 116 Euro, 242 European Union (EU), 242–243 Evaluation apprehension, 159 EVA (economic value added), 539–541 Executive information systems (EISs), 570 characteristics of best-selling, 571 Expatriates, 260 importance of training to families of, 263 Expectancy, 430 Expectancy theory, 429–432 components of, 429–431 defined, 429 motivating with, 431–432 Experience, openness to, 397–398 Experiential approach to innovation, 214–216 goals of, 216–218 Expert systems, 574 Exporting, 247–248 Extensible markup language (XML), 572 External attribution, 489 External environments characteristics of, 70–74 cognitive maps of, 86–87 complex, 72–73 making use of changes in, 178
process for making sense of changes in, 85–88 resource scarcity, 73–74 simple, 72 uncertainty in, 74 External forecasts, 339–340 External locus of control, 400 External recruiting, 350–351 Externals, 466 Extinction, 435 Extranets, 572–573 Extraversion, 396–397 Extrinsic rewards, 420–421 Extroversion, 456
F Fair Labor Standards Act (FLSA), 427 Family and Medical Leave Act, 78, 343, 344 Favoritism, 40 Federal employment laws, 343–344, 344 Feedback, 61, 273 behaviors, 135 channels, opening, 288 constructive, 504 control, 527 destructive, 504 giving, 504–505 grapevine, as source of, 496 performance, 140, 440 performance appraisal, 366–368 problem-oriented, 505 to sender, 492 soliciting negative as well as positive, 406 spatial distance and, 453 specific, 505 survey, 513 to workers, 287 Feedforward control, 527 Feelings, reflecting, 503–504 Field simulation, 261 Figurehead role, 15 Final assembly, 601 Financial ratios, 539 books that explain, 537, 539 common, 538 use of, 537 Financial rewards, 438 Finished goods inventories, 601 Firewalls, 567 Firm-level strategies direct competition, 191–193 entrepreneurship and intrapreneurship, 194–196 strategic moves of direct competition, 193–194 First-line managers, 12–13 First-mover advantage, 555–556 Fixed interval reinforcement schedules, 436 Fixed ratio reinforcement schedules, 436 Flexibility, maintaining, 140–141
Index
Flexible benefit plans, 371–372 Flow, 212 FLSA (Fair Labor Standards Act), 427 Focus strategy, 189 Forecasting methods, 340 Forecasting techniques, 57 Foreign Corrupt Business Practices Act (FCPA), 256 Formal communication channels, 493–494 Forming, 322 Four-fifths (or 80 percent) rule, 345 Franchises, 249–250 Fraud lawsuits, 78 Freedom, 213 Free Trade Area of the Americas (FTAA), 244 Functional departmentalization, 274–275 Functional turnover, 375–376 Fundamental attribution error, 489–490 defensive bias and, 490
G GAAP (generally accepted accounting principles), 477 Gainsharing, 330 Gantt charts, 43, 44 Gender -based litigation, 383 discrimination, 391–392 General Agreement on Tariffs and Trade (GATT), 241–242 General Electric workout, 227 General environment, 61, 74–79 economy and, 75–76 political/legal component of, 78–79 sociocultural component of, 77–78 technological component of, 76 Generally Accepted Accounting Principles (GAAP), 477 Generational change, 217 Geographic departmentalization, 277–278 Glass ceiling, 391–392 Global business consistency versus adaptation approach to, 246–247 cooperative contracts and, 248–250 cultural differences and, 257–259 defined, 238 effect on consumers of, 244–245 exporting and, 247–248 Fair Labor Association and, 247 Foreign Corrupt Business Practices Act (FCPA), 256
693
forms for, 247 global new ventures and, 251–252 growing markets and, 252–254 impact of, 238–240 minimizing political risk of, 255–257 office/manufacturing locations and, 254–255 predeparture language and cross-cultural training, 260–261 preparing for international assignments and, 259–261, 263 spouse, family, and dual-career issues, 261, 263 strategic alliances and, 250–251 trade agreements and, 241–244, 244–245 trade barriers and, 240–241, 244–245 wholly owned affiliates and, 251 Global consistency, 246 Global new ventures, 251–252 Global positioning satellite (GPS) technology, 531 Goal acceptance, 440 Goal commitment, 138 Goal difficulty, 440 Goals of compression approach to innovation, 216 defined, 439 developing commitment to, 138 disagreement over team, 322 distal, 139–140 effect on motivation of rewards and, 432–433 of experiential approach to innovation, 216 proximal, 139–140 setting, 102, 135, 137–138 setting high but realistic, 406 setting team, 324–326 S.M.A.R.T., 137, 324 stretch, 138, 325 Goal setting, 102, 135, 137–138 effectiveness of, 140 Goal-setting theory, 439–442 components of, 440 defined, 440 motivating with, 440–442 Goal specificity, 440 Gossip chain, 495, 496 Government import standards, 241 Grand strategies, 184–186 defined, 184 growth strategy, 185 retrenchment/recovery strategy, 185–186 stability strategy, 185
Grapevines, 495–497 accuracy of, 495–496 Graphic rating scales, 365–366 Great Depression, 120, 415 “Great person” theory. See Trait theory Griggs v. Duke Power Co., 349 Group decision making advantages and pitfalls of, 153–154 considering negative consequences and, 157 Delphi technique for, 156–158 electronic brainstorming and, 158–160 nominal group technique for, 156 stepladder technique for, 158, 159 structured conflict in, 154–156 Groupthink, 153–154, 310 conditions for, 154 Growth need strength, 289 Growth strategy, 185
H Halo error, 365 “Hawthorne Effect,” 53 Hawthorne Studies, 51, 53–54 Hazard Analysis and Critical Control Points (HACCP) program, 82 Hearing, 502 Hierarchical pay structures, 371 Hispanics in management, 393 purchasing power of, 388 statistics regarding, 384 Holding cost, 603 Honesty, 455 Horizontal communication, 494 Hostile work environment, 346 Hotlines, company, 513 HRIS (human resource information system), 340–342 HRM (human resource management), 638 HRP (human resource planning), 339 Human relations management, 49–56 constructive conflict and coordination, 49–51 cooperation and acceptance of authority, 54–56 Hawthorne Studies, 51, 53–54 Human resource information systems (HRISs), 340–342 common data categories in, 341 Human resource management (HRM) compensation and, 369–372 components of, 338 determining needs through, 338
employee selection and, 351–359 employee separations and, 372–376 federal employment laws and, 343–345 human resource information systems (HRISs) and, 340–342 importance of job analysis to, 349 performance appraisals and, 364–368 process, 338 recruitment and, 348–351 Human resource planning (HRP) defined, 339 human resource information systems (HRISs) and, 340–342 use of performance appraisals in, 364–365 work force forecasting and, 339–340 Human skills, 19
I Imperfectly imitable resources, 169 Imports, 241 Impression management, 418 In-basket exercises, 356 Incentives, 41 for early retirement, 374–375 group, 370 output control and, 531–532 for teams, 329–330 types of, 55 Income statements, 537, 539 Incremental change, 211 management innovation during, 216–218 Independent demand systems, 606 Individualism-collectivism, 326 Individualists, 326 Industrial Revolution, 37 Industry-level strategy adaptive strategies, 189–191 industry forces and, 186–188 positioning strategies, 188–189 question addressed by, 186 Industry regulation, 82–83 federal agencies and commissions, 84 Inequity forms of, 425 looking for and correcting major, 427–428 reactions to perceived, 425–427 Informal communication channels, 495–497 Information. See also Data accessing and sharing, 569–573
694
accurate, 557–558 acquisition costs of, 559–560 capturing, 561–562 characteristics of useful, 557–559 communication costs of, 560 complete, 558 dissemination of, 16 getting and sharing, 561–569 processing costs of, 559 protecting, 564, 566–569 relevant, 558 retrieval costs of, 560 storage costs of, 559–560 strategic importance of, 555–557 technologies, adoption of new, 59–60 timely, 558–559 Informational roles, 15–16 Information management, 58–60 Information technology external access and sharing, 571–573 first-mover advantage and, 555–556 internal access and sharing, 570–571 sustaining competitive advantage with, 556–557 Initial assembly, 600 Innovation of entrepreneurial firms, 196 experiential approach to, 214–216 importance of, 204–205 managing sources of, 212–214 planning for incremental, 216–217 process, shortening time of steps in, 217 S-curve pattern of, 206–208 streams, 208–211 technological, 208 technological, since 1900, 205 Innovation management, 211–218 during discontinuous change, 214–216 during incremental change, 216–218 managing sources of innovation, 212–214 Innovation streams, 208–211 Inputs, 424 decreasing or withholding, 426–427 rationalizing or distorting, 427 reducing, 428 Instrumentality, 430–431 Integrative conflict resolution, 50 Integrity, 455 Integrity tests faking and coaching on, 113 overt, 112, 113 personality-based, 112, 113 predicting job performance with, 113
Index
Intelligence, 456 Intermittent reinforcement schedules, 435 Internal attribution, 489, 490 Internal environment, 88 Internal forecasts, 339 Internal locus of control, 400 Internal motivation, 286–287 Internal recruiting, 349–350 Internals, 466 Internal service quality, 593–594 components of, 594 Internet access, 170–171 external recruiting on, 350–351 gripe sites, 497 long-distance phone calls on, 80–81 marketing of products and services on, 561 phone service, as threat to traditional phone companies, 86 rapid advance of, 206 self-service access to HRISs on, 341 training, 362–364 Internet service providers (ISPs), 170–171 Interorganizational processes defined, 297 modular organizations, 297–298 virtual organizations, 298–299 Interpersonal roles, 14–15 Interpersonal skills, 328 Interpretation, 487, 488 Interval reinforcement schedules, 435 Interventions change, 221 large system, 229 organizational development, 228, 228–229, 229 person-focused, 229 small group, 229 Interviews, 357, 359 semistructured, 359 structured, 357 unstructured, 357 Intranets, 570 Intraorganizational processes behavioral informality, 293–296 defined, 290 empowerment, 292–293 example of, 290–291 reengineering, 291–292 Intrapreneurship, 195 Intrinsic rewards, 421, 422 Introversion, 396–397, 456 Invasion of privacy suits, 78 Inventory, 34 costs of maintaining, 603–604 defined, 58, 600 managing, 604–606 measuring, 601–603
systems, 57 types of, 600–601 Inventory management economic order quantity (EOQ), 605, 606 goals of, 604 just-in-time (JIT) inventory system, 605 materials requirement planning (MRP), 606 techniques, 605–606 Inventory turnover, 602 Involuntary separation, 372 ISO 9000, 589 ISO 14000, 589
J JCM (job characteristics model), 286-288 JIT (just-in-time) inventory system, 34, 58, 605 Job applicants, integrity test screening of, 113 Job characteristics model (JCM), 286, 286–288 uses of, 289 Job description, 348 example of, 348 Job design, 284 job characteristics model, 286–288 job rotation, enlargement, and enrichment, 285–286 job specialization, 284–285 Job enlargement, 285 Job enrichment, 34, 285–286 Job evaluation, 369 Job performance, 417 Job posting, 349 Job readiness, 467–468 Job rotation, 285 Job satisfaction, consideration and, 457–458 Job shops, 599 Job specialization, 284–285 Job specifications, 348 example of, 348 Joint ventures, 250–251 Just-in-time (JIT) inventory system, 34, 58, 605
K Kanban, 606 Kinesics, 498–499 Knowledge defined, 573 and expertise, sharing, 573–574 incorporating new information into existing, 487
L Labor productivity, 584 Labor unrest, 40 Large system interventions, 229 Layoffs, 374 Leaderless group discussion, 356 Leader-member relations, 461
Leaders charismatic, 456 versus managers, 451 traits of, 454–457 Leadership, 8–9 achievement-oriented, 465 behaviors, 457 charismatic, 456, 474–477 contingency theory and, 460–463 defined, 450 difference between management and, 451 directive, 464 grid, Blake/Mouton, 458, 458–459 neutralizers, 452–454, 453 path-goal theory of, 463–467 powerful, 216 role, 15 situational approaches to, 459–460 situational theory of, 467–469 strategic, 472–474 substitutes for, 452–454, 453 supportive, 464–465 traits, 454–457 transactional, 478 transformational, 477–478 visionary, 474–478 Leadership style contingency theory of, 460–463 defined, 459 matching, to situations, 462–463 path-goal theory of, 463–467 situational theory of, 467–469 Learned Needs Theory (McClelland), 419 Learning-based planning, 141 Legal responsibility, 122 Leniency error, 365 Liaison role, 15 Licensing, 248–249 Linear programming, 57 Line authority, 281 Line-flow production, 598–599 Line function, 281 Listening, 502–504 active, 502–503 defined, 502 empathetic, 503–504 Litigation class-action, 383, 385, 387 control, 528 defamation, 78 emotional distress, 78 ethnic discrimination, 393 fraud, 78 gender-based discrimination, 343, 383 invasion of privacy, 78 negligent hiring, 78 performance appraisals and, 364–365
Index
racial discrimination, 385, 387, 393 sexual harassment, 345–346 wrongful discharge, 373 wrongful termination, 78 Local adaptation policy, 246–247 Locus of control, 400, 466 Lost efficiency, 603
M Maastricht Treaty of Europe, 242–243 Machiavellian personalities, 399 Made-to-order operations, 597 Magnitude of consequence, 108 Make-to-stock operations, 597 Management administrative, 46–49 African Americans in, 392 Asian Americans in, 393 bureaucratic, 45–46, 530 contingency approach to, 62 description of, 4–5 difference between leadership and, 451 evolution of, 38 Fayol’s principles of, 48 Follett’s contributions to, 52 functions, 5–6, 8–9 Hispanics in, 393 human relations, 49–56 ideas and practice throughout history, 35–36 importance of good, 23–26 information, 58–60 jobs, ethics and nature of, 101–102 operations, 57–58 origins of, 34–38 scientific, 38–39 “seat-of-the-pants,” 43 self-, 534 systems, 60–61 transition to, 21–23 women in, 391–392 Management by objectives (MBO), 143 defined, 144 as method of tactical planning, 144 Management operations service operations and, 592–596 Managers authority, autonomy, and power of, 55 and customer satisfaction, 25–26 decisional roles of, 16–17 employee behavior influenced by, 102 ethical standards and, 11, 101 first-line, 12–13 ideas of, in top performing companies, 24–25 informational roles of, 15–16
695
interpersonal roles of, 14–15 kinds of, 10–14 leaders versus, 451 middle, 11–12 mistakes made by, 20–21 negotiation by, 17 potential legal risks faced by, 78 reasons for, need of, 36–37 skills needed by, 18–19 team leaders, 13–14 three-step process for, to make sense of changes in external environments, 85–88 top, 10–11 uses of meta-analysis for, 7 using bureaucratic control, 46 what companies look for in, 18–20 Manufacturing flexibility, 598 Manufacturing operations amount of processing in, 597–598 flexibility of, 598–600 Market commonality, 192, 194 Market entries, 195 Market exits, 195 Maslow's hierarchy of needs, 419 Mass production, 37 Material incentives, 55 Materials requirement planning (MRP), 606 Matrix departmentalization, 278–280 cross-functional interaction in, 279 Maximizing, 151 Mechanistic organizations, 288 Media advocacy, 83 Mentoring, 392, 407, 452 Mercosur, 244 Meta-analysis, 7 Microchronometer, 42 Middle managers, 11–12 Milestones, 215 Minority domination, on teams, 310, 320 Modular organizations, 297–298 Monitor role, 16 Monochronic cultures defined, 508 polychronic cultures versus, 508–509 time in, 509 Mood linkage, 401 Moore's law, 554 Moral development, stages in, 109–110 Motion studies, 41–42, 44 Motivation, 33 components of, 416, 416–417 defined, 416 effect of perceptions and expectations on, 423
effect of rewards and goals on, 432–433 effort and performance and, 417–418 equity theory of, 424–429 expectancy theory of, 429–432 extrinsic and intrinsic rewards and, 420–421 goal-setting theory of, 439–442 guidelines for, 421–423 inspirational, 477 integrated model and, 442, 443 internal, 286–287 in job characteristics model, 286–288 to manage, 19 need satisfaction and, 418–420 and performance, basic model of work, 417 reinforcement theory of, 433–437, 439 team, 325–326 use of incentives for, 41 MRP (materials requirement planning), 606 Multifactor productivity, 584–585 Multifunctional teams, 215–216 Multinational corporations, 239. See also Global business diversity programs in, 388 Fair Labor Association and, 247 global consistency approach of, 246–247 local adaptation approach of, 246–247 wholly owned affiliates and, 251
N NAFTA (North American Free Trade Agreement), 243-244 National culture, 257 National Labor Relations Act (NLRA), 51 Native Americans, statistics regarding, 384 Needs, 418–420 classification of different theories, 420 defined, 418 ERG Theory (Alderfer), 419 expectations of changing, 422 higher-order, 419–420, 422 Learned Needs Theory (McClelland), 419 lower-order, 419–420, 422 Maslow’s hierarchy of, 419 unmet, 419 of workers, discovering, 421–422 Needs assessment, 361–362 Negative affectivity, 401 Negative reinforcement, 434–435
Negligent hiring suits, 78 Negotiation, conducted by managers, 17 Negotiator role, 17 Nepotism, 40 Net Operating Profit After Taxes (NOPAT), 540 Neutral cultures, 506–507 NLRA (National Labor Relations Act), 51 Noise, 492 Nominal group technique, 156 Nonfinancial rewards, 330, 418, 438 Nonsubstitutable resources, 170 Nontariff barriers, 240 Nonverbal communication, 498–499 Normative controls, 532–533 NOPAT (Net Operating Profit After Taxes), 540 Normative decision theory, 469–472 components of, 469 decision quality and acceptance in, 470–472 decision styles in, 469–470 examples of problems in, 471–472 rules, 471 Norming, 323 Norms, 318 North American Free Trade Agreement (NAFTA), 243–244
O Objective control, 531–532 Objective performance measures, 365 Occupational Safety and Health Act (OSHA), 344 O/I Ratio (outcome/input ratio), 425 One-on-one communication, 497–498 managing, 500–510 Online discussion forums, 511 Openness to experience, 397–398 Open office systems, 294 defined, 295 Open systems, 60–61 Operational plans, 144–146 budgets, 146 single-use plans, 145 standing plans, 145 Operations management, 57–58 inventory and, 600–606 manufacturing operations and, 596–600 quality and, 586–592 relation of productivity to, 582–586 Opportunistic behavior, 82 Opportunity cost, 603
696
Optical character recognition, 562 Options-based planning, 140–141 Oral communication, 500–501. See also Communication Ordering cost, 603–604 Organic organizations, 288 Organizational authority chain of command in, 281 degree of centralization in, 283 delegation of authority and, 282–283 line versus staff authority in, 281–282 Organizational change, 218–219 common errors of managers leading, 223–229 managing, 220–221 organizational decline and, 219–220 resistance to, 221–223 tools and techniques, 226–229 Organizational cultures change and, 225–226 changing, 91–93 consistent, 91 creation and maintenance of, 88–89 successful, 90–91 three levels of, 91 Organizational decline, 219–220 Organizational development, 228–229 interventions, general steps for, 228 kinds of interventions for, 229 Organizational heroes, 89 Organizational innovation, 204–205 defined, 204 innovation streams and, 208–211 technology cycles and, 206–208 Organizational plurality, 404 Organizational processes defined, 273 designing, 288–299 Organizational silence, 512–513 defined, 512 ways of overcoming, 513 Organizational stories, 89 Organizational strategy, 168 corporate level strategies, 180–186 firm-level strategies, 191–196 industry-level strategies, 196–191 strategy-making process, 172–180 sustainable competitive advantage and, 168–171 Organizational structures authority and, 280–283 defined, 272 departmentalization, 274–280 designing, 274–288
Index
job design and, 284–288 Organization, process of, 487, 488 Organizations achieving competitive advantage, 168–169 Barnard’s definition of, 54 centralized, 283 change in work setting of, 230 decentralized, 283 diversity in, 384–385 effect of reengineering on orientation of, 291 elements of bureaucratic, 46 environmental complexity of, 61 feedback to, 61 Follett’s principles of, 50–51 mechanistic, 288 modular, 297–298 organic, 288 social responsibility and, 121–122. See also Social responsibility systems view of, 60–61 virtual, 298–299 Organization-wide communication getting messages out in, 510–512 hearing others, 512–514 informal meetings and, 513 managing, 510–514 role of email in, 510–511 surprise visits and, 513–514 survey feedback and, 513 Organizing, 8 OSHA (Occupational Safety and Health Act), 344 Outcome/input (O/I) ratio, 425 Outcomes, 424 desirability of, 429–430 increasing, 427, 428 rationalizing or distorting, 427 Outplacement services, 374 Output control, 531 Overlapping steps, 217–218 Overreward, 425 Overt integrity tests, 112, 113
P Paradigms, for managing diversity, 403 access and legitimacy, 403–404 discrimination and fairness, 402 learning and effectiveness, 404–405 Paralanguage, 499 Paraphrasing, 503 Partial productivity, 584–585 Participative leadership, 465 Passwords for accessing extranets, 573 dos and don’ts, 568 Path-goal theory, 463–467, 465, 467 components of, 463–464 leadership styles in, 464–465
outcomes in, 466–467 subordinate and environmental contingencies in, 466 Pay-level decisions, 369 Pay-structure decisions, 371 Pay-variability decisions, 370 PDF documents, 562 Perceived ability, 466 Perception communication and, 486–487 defined, 487 effect of culture on, 505–506 of others, 489–490 problems, 488–489 process, 487–488 selective, 488 self-, 490 of social responsibility, 117 Perceptual filters, 487–488 Performance. See also Performance appraisals; Productivity accurately measuring job, 365–366 basic model of work motivation and, 417 charisma and, 456 compensation linked to, 376 effort and, 417–418 expectancy and, 430 feedback, 440 linkage of rewards to, 432 organizational. See Balanced scorecard perceived relationship between rewards and, 430 predicting job applicant's onthe-job, with meta-analysis, 7 Performance appraisals. See also Performance feedback from, 135, 366–368 job analysis and, 349 measurements for, 365–366 scales, subjective, 365 uses of, 364–365 Performance feedback, 440 Performance tests, 356 Performing, 323 Personal aggression, 104 Personality, 355 authoritarian, 399 Big Five dimensions of, 356, 396–398 defined, 396 dimensions, work-related, 398–401 highly dominant, 456 Machiavellian, 399 organized, hardworking, responsible, 398 Type A, 399–400 Type B, 400 Personality-based integrity tests, 112, 113 Personality tests, 355–356 Person-focused interventions, 229
Phased retirement, 375 Phase model of globalization, 247, 251 Piecework, 370 Planning bending in the middle, 143–144 benefits of, 135 defined, 6, 134 developing commitment to goals, 138 developing effective action plans, 138–139 finishing at the bottom, 144–146 and implementing change process, 222 for incremental innovation, 216–217 learning-based, 141 maintaining flexibility, 140–141 options-based, 140–141 pitfalls, 135–136 setting goals, 137–138 starting at the top, 142–143 strategic, 142 time lines, 143 tracking progress, 139–140 Policies, 145 Policy uncertainty, 255–257 Political deviance, 104 Political risk, minimizing, 255–257 Political uncertainty, 255–257 Pollution minimization, 544–547 Polychronic cultures defined, 508 monochronic cultures versus, 508–509 time in, 509 Pooled interdependence, 292 Portfolio strategy, 180–184 acquisitions and, 181 BCG matrix, 181–183 cash cows in, 182, 183 defined, 181 dogs in, 182, 183 question marks in, 182, 183 stars in, 182, 183 unrelated diversification and, 181 Positioning strategies, 188–189 Position power, 461–462 Positive affectivity, 401 Positive reinforcement, 434 Postconventional level of moral development, 110 Power danger of authority, autonomy, and, 55 inherent in management positions, 101 “with” not “over” others, 51 Power distance, 257–258 Preconventional level of moral development, 109 Predictive patterns, 564
Index
Pregnancy Discrimination Act (1978), 344 Primary stakeholders, 119 issues important to, 120 Principle of distributive justice, 111 Principle of government requirements, 111 Principle of individual rights, 111 Principle of long-term selfinterest, 110 Principle of personal virtue, 110 Principle of religious injunctions, 111 Principle of utilitarian benefits, 111 Printing press, 59 Private spaces, 295–296 Proactive monitoring, 80 Proactiveness, of entrepreneurial firms, 196 Proactive strategy, 124 Probability of effect, 108 Problems, 147–148 defined, 147 Problem solving benefits of diversity to, 388 in normative decision theory, 471–472 teams, 388 Procedural justice, 428–429 Procedures, 146 Processing costs, 559 Product boycott, 84 Product departmentalization, 275–276 Product failure, 587 Production blocking, 158–159 Production deviance, 102 Productivity benefits and importance of, 583–584 defined, 582–583 early attempts to increase, 40 increases in, 573 kinds of, 584–585 managing for, 582 measurement and improvement, 57 Product liability law, 78 Product prototype, 214 Product reliability, 587 Profit sharing, 370 Project management, 57 Project manufacturing, 599 Project teams, 316–317 Property deviance, 102–103 Proposition 209 (California), 386 Prospectors, 190 Protecting information, 564, 566–569 Protectionism, 240 Proximal goals, 139–140 Proximity of effect, 109 Psychological readiness, 467–468 Public communications, 83 Public key encryption, 568 Punctuated equilibrium theory, 71
697
Punishment, 435 administering, at appropriate time, 437 Purchasing power, 253 of minorities, 388
Q QDMA (quad-division multiple access) radio communication, 557 Quality. See also Quality control advantages and disadvantages of different measures of, 544 Baldrige National Quality Award, 590–591 defining and measuring, 542–543 internal service, 593–594, 594 managing for, 582 meanings for, 586–587 -related characteristics for products and services, 587–589 standards, 589–590 total quality management (TQM) and, 591–592 Quality control, 57 Question marks, in portfolio strategy, 182, 183 Quid pro quo sexual harassment, 345–346 Quotas, 240
R Racial and ethnic discrimination, 392–394 Radio frequency identification (RFID) tags, 562 Rare resources, 169 Rate buster, 39 Rater training, 366 Rational decision making, 146–147. See also Decision making defined, 147 evaluation of alternatives, 149–150 generating alternative courses of action, 149 identifying decision criteria, 148–149 limits to, 151–152 problem definition in, 147–148 steps and limits to, 147–152 weighting criteria, 149 Ratio schedules, 435 Raw data, 555 transforming, 562–563 Raw material inventories, 600 Reactive customer monitoring, 79–80 Reactive strategy, 123 Reactors, 190–191 Reciprocal interdependence, 292 Recovery, 185–186 Recruitment defined, 347
external, 350–351 internal, 349–350 job analysis and, 348–349 Recycling, 545–546 Reengineering, 291–292 defined, 291 References, 353–354 falsification of, 352 waivers for checking, 354 Referents, 424–425 changing, 427 Refreezing, 221 Regional trading zones, 242 Regulation costs, 528 Reinforcement contingencies, 433 defined, 433 negative, 434–435 positive, 434 schedule of, 433 schedules for delivering, 435–457 Reinforcement contingencies, 433 kinds of, 434–435 Reinforcement theory, 433–437, 439 components of, 433–435 defined, 433 delivery schedule for, 435–457 motivating with, 437, 439 Related diversification, 184 Relationship behavior, 82 Relative comparisons, 149 Resistance forces, 221 Resistance to change, 221 managing, 221–223 Resource allocator role, 17 Resources, 168 imperfectly imitable, 169 nonsubstitutable, 170 rare, 169 valuable, 169 Resource scarcity, 73–74 Resource similarity, 192–193, 194 Response, 193, 194 clarifying, 503 Responsiveness, 588 Rest breaks, as controversial, 40 Results-driven change, 226–227 Résumés, 352 Retention, 487, 488 Retirement, phased, 375 Retrenchment strategy, 185–186 Retrieval costs, 560 Rewards according to equity theory process, 425 desirability of, 429–430 effect on motivation of goals and, 432–433 expectations about, 423 extrinsic, 420–421 financial, 438 intrinsic, 421, 422 linkage of performance and, 432
nonfinancial, 330, 418, 438 output control and, 531–532 perceived relationship between performance and, 430 programs, 431 social, 438 RFID (radio frequency identification) tags, 562 Risk controlling legal, 528 of entrepreneurial firms, 196 strategies pertaining to, 177–179 Risk-avoiding strategy, 177–179 Risk-seeking strategy, 177–179 Rules and regulations, 146
S Sarbanes-Oxley Act, 116 Satisficing, 151 Scanners, electronic, 562 Schedule of reinforcement, 433, 435, 436 Schedule time, 509 Scheduling systems, 57 Scientific management, 38–39, 44 father of, 39–41 Gantt charts, 43 principles of, 40 time and motion studies, 41–42 S-curve pattern of innovation, 206–208 Secondary firms, 176 Secondary stakeholders, 120 Secure sockets layer (SSL) encryption, 568 Selection, 92–93. See also Employee selection Selective perception, 488 Self-confidence, 455 Self-control, 534 Self-designing teams, 315 Self-management, 534 Self-managing teams, 314–315 Self-perception, 490 Self-serving bias, 490–491 Semi-autonomous work groups, 314 Semistructured interviews, 359 Sequence patterns, 563–564 Sequential interdependence, 292 Serviceability, 587 Service capability, 594–595 Service operations description of, 593 service-profit chain and, 593–595 service recovery and empowerment, 595–596 total quality management (TQM) and, 591–592 Service-profit chain, 593–595, 594 Service recovery, 595–596 Service reliability, 588
698
Services consumption of, 587–588 quality-related characteristics for products and, 587–589 Setup cost, 603 Sexual harassment, 345–346 Shadow-strategy task force, 176 Shared spaces, 295–296 Shareholder model, 118–119 Simple environments, 72 Simple matrix, 280 Single-use plans, 145 Situational analysis, 173–177 Situational favorableness, 461, 462 Situational theory, 467–469 leadership styles in, 468–469 worker readiness, 467–468 Skill-based pay, 329–330 Skills-based diversity training, 406–407 Skill variety, 287 Slackers, 309, 310 Slack resources, 140–141 Small group interventions, 229 S.M.A.R.T. goals, 137, 324 Social consensus, 108 Social integration, 389 Social loafing, 309–310 Social responsibility defined, 117 difficulty regarding perception of, 117 discretionary responsibilities and, 122 economic performance and, 124–126 economic responsibility and, 122 ethical responsibility and, 122 legal responsibility and, 122 responses to demands for, 123–124 shareholder model, 118–119 stakeholder model, 119 Social responsiveness, 123 Social rewards, 438 Software, 554 antivirus, 567 backward compatible, 217 importance to businesses of, 555 optical character recognition, 562 Web sites for free, 171 Soldiering, 39 Specific ability tests, 354 Specific environment, 61, 75 competitor component of, 80–81 customer component of, 79–80 effect of advocacy groups on, 83–84 industry regulation component of, 82–83 supplier component of, 81–82 Spokesperson role, 16
Index
Stability strategy, 185 Stable environments, 70–71 Staff authority, 281 Staff function, 281–282 Stakeholder model, 119 Stakeholders, 119 expectations of, 122 primary, 119 secondary, 120 Standardization, 283 Standard of living, productivity and, 583 Standards comparison to, 525–526 ISO 9000 and 14000, 589–590 setting, 524–525 Standing plans, 145 Stars, in portfolio strategy, 182, 183 Statistical/historical ratios forecasting, 340 Stepladder technique, 158 Stock options, 370 Stockout costs, 604 Stockouts, 601–602, 604 Storage costs, 559–560, 603 Storming, 322 Strategic alliances, 250–251 Strategic dissonance, 173 Strategic group, 175–176 Strategic leadership, 472–474 defined, 473 Strategic planning, 142 Strategic plans, 34, 142 Strategic reference points, 177–178 Strategic Reference Point Theory, 177, 178–179 Strategy-making process assessing need for change and, 172–173 choosing strategic alternatives and, 177–179 producing sustainable competitive advantage by using, 174 situational analysis and, 173–177 Stretch goals, 138, 325 Strong cultures, 91 Structural accommodation, 325–326 Structured interviews, 357, 358, 359 guidelines for conducting effective, 359 Subjective performance measures, 365 Suboptimization, 536 Subsidies, 241 Subsystems, 60 Summarizing, 503 Supervised data mining, 563 Supplier dependence, 81–82 Supplier involvement, 217 Suppliers, 81–82 bargaining power of, 188
Supportive leadership, 464–465 Surface-level diversity, 389–396 age and, 390–391 defined, 389 gender and, 391–392 mental or physical disabilities and, 394–395 race/ethnicity and, 392–394 Survey feedback, 513 Sustainable competitive advantage, 169 using strategy-making process, 174 SWOT analysis, 173–177 Synergy, 61 defined, 60 Systems closed, 60 defined, 60 open, 60–61 Systems management, 60–61
T Tactical plans, 143 Tangibles, 588 Tariffs, 240 Task identity, 287, 289 Task interdependence, 292 Tasks, combining, 287 Task significance, 287, 289 Task structure, 461–462, 466 Team development forming stage, 322 norming stage, 323 performing stage, 323 stages in, 322–324 storming stage, 317, 322 Team diversity, 327 Team leaders, 13–14 training for, 329 Team level, 327 Team(s). See also Team development; Total quality management (TQM); Work teams advantages of, 306–309 autonomy and, 313–315 bureaucratic immunity for, 326 cohesiveness, 318–320 compensation and recognition, 329–330 conflict in, 321–322 cross-functional, 315 disadvantages of, 309–310 diversity, 327 employee involvement, 307, 314 kinds of, 312–317 level, 327 minority domination of, 310, 320 multifunctional, 215–216 norms, 318 performance, cohesivenss and, 319 problem-solving, 307, 388 project, 316–317
selecting people for, 326–328 self-designing, 315 self-managing, 314–315 semi-autonomous work groups, 314 setting goals and priorities for, 324–326 size, 320–321 slackers on, 309 stages in development of, 322–324 training, 328–329 transition management, 227–228 virtual, 315–316 when to use, 310–312 Teamwork, 592 Technical skills, 18–19 Technological discontinuity, 208–209 Technological lockout, 210–211 Technological substitution, 209 Technology adoption of new information, 59–60 assistive, 395 components of general environment, 76 global positioning (GPS) satellite, 531 innovation and, 205, 208 SSL, 568 Technology cycles, 206–208 Televised/videotaped speeches and meetings, 511 Temporal immediacy, 108–109 Termination, employee, 373–374 Terrorist attacks, of September 11, 2001 effect on airline industry of, 11, 72 Testing, 214–215 Tests, selection, 112, 113, 354–357, 358 Threat of new entrants, 187 Threat of substitute products or services, 187–188 360-degree feedback, 366–368 Time, cultural orientation toward, 508–5-9 Time studies, 42, 44 Top managers, 10–11 Total quality management (TQM), 591–592 Trade agreements, 241–244 Trade barriers, 240–241 Traditional work groups, 313–314 Training awareness, 406 cross, 308, 329 defined, 360 determining needs for, 361–362 evaluating, 364 methods, 362–364 objectives and methods, 363
Index
older workers and, 391 of performance raters, 366 and practice, diversity, 406–407 skills-based, 406–407 team, 328–329 Trait rating scales, 365–366 Traits defined, 454 leadership, 454–457 Trait theory, 454–455 Transactional leadership, 478 Transaction processing, 340 Transformational leadership, 477–478 Transient firms, 176 Transition management teams (TMTs), 227–228 primary responsibilities of, 228 Turnover functional, 375–376 rates for African Americans, 387 rates for women, 387 of work teams, 309 Two-factor authentication, 566–567 Type A/B personality dimension, 399–400 Type A personalities, 399–400 Type B personalities, 400
U Uncertainty, environmental, 74 Underreward, 425 Unethical charismatics, 475 behaviors of, 476 Unfreezing, 221 mistakes during, 223–224 Uniformed Services Employment and Reemployment Rights Act (USERRA), 343, 344 Uniform Guidelines on Employee Selection Procedures, 349, 352 United States Official Harmonized Tariff Schedule, 241 Unity of command, 281 Unrelated diversification, 181 Unstructured interviews, 357 Unsupervised data mining, 563 Upward communication, 494 Usenet user groups, 514 U.S. Sentencing Guidelines for Organizations, 100, 113 compliance program steps for, 107 determining punishment under, 105–106 groups covered by, 104–105 offense levels, base fines, culpability scores, and possible total fines, 105
699
V Valence, 429–430 Validation, 352 Valuable resources, 169 Value, 543 Variable interval reinforcement schedule, 436 Variable ratio reinforcement schedules, 436 Variation, 592 Vertical loading, 288 Virtual organizations, 298–299 Virtual private networks (VPNs), 568 Virtual teams, 315–316 tips for managing successful, 316 Virus, 567 Visible artifacts, 92 Vision, 142–143 for change, lacking, 224 company, 90–91 Visionary leadership, 474–478 charismatic leadership, 474–477 results gained from, 474 transformational leadership, 477–478 Vision statements, 91, 142–143 Vocational Rehabilitation Act, 42 Voice mail, 512 employee communication using, 16 Voice messaging. See Voice mail VOIP (voice over Internet protocol), 80–81 as threat to traditional phone companies, 86 Voluntary export restraints, 240–241 Voluntary separation, 372 VPN (virtual private network), 568 Vroom-Yetton-Jago model. See Normative decision theory
W Wagner Act, 51 Waste minimization four levels of, 545 recycle and reuse, 545–546 waste disposal, 546–547 waste prevention and reduction, 544–545 waste treatment, 546 Waste prevention, 544–545 Web services, 569, 572 difference between EDI and, 572 Web sites, 25, 78, 80, 81, 190. See also Blogs codes of ethics, 112 concerning software piracy, 110
disability-related issues, 394, 395 discussion, 514 EEOC, 405 encryption downloads, 568 ESOPs and stock options, 370 ethical decision making games, 115 federal agencies and commissions, 84 federal employment laws, 343, 344 free software, 171 IAT, 406 information about Baldrige Award, 591 information on workplace violence, 104 intranet, 570 ISO standards, 590 political risk, 256 rights of whistleblowers, 116 trade agreements, 242, 243, 244 U.S. Sentencing Guidelines for Organizations, 106 wireless security and encryption protocols, 569 workings of virtual organizations, 299 Whistleblowing, 116–117 Wholly owned affiliates, 251 Wireless networks, 568–569 Women businesses owned by, 391 discrimination against, 383 in management, 391–392 turnover rates for, 387 in work force, 384 Work challenging, 212 change in nature of, 36–37 meaningful, 286–287, 421 measurement techniques, 57 motivation and performance, basic model of, 417 -related personality dimensions, 398–401 setting, parts of organizational, 230 units, natural, 288 use of motion studies to simplify, 41–42 Worker readiness, 467–468 Workers. See also Work force forecasting developing qualified, 360–368 empowering, 292–293 expectations of, 423 finding qualified. See Recruitment
keeping qualified, 368–372 machine design for handicapped, 42 measurement of behavior or output of, 531 reasonable accommodations for disabled, 395 training of, 40 Work force aging of, 384 older people in, 390–391 women in, 384 Work force forecasting, 339–340 internal and external factors influencing, 339 Work groups. See also Teams autonomous, 533 primary, 466 semi-autonomous, 314 traditional, 313–314 Work-in-process inventories, 600 Work Keys method, 361–362 Workplace accommodations for disabilities, 394–395 deviance, 102–104 diversity, 384 violence, Web site for information on, 104 Workplace deviance, 102–104 cost of, 113 integrity tests and, 113 types of, 103 Work sample tests, 356, 358 Work teams. See also Team development; Team(s) defined, 306 enhancing effectiveness of, 324–330 establishing, 306 initially high turnover of, 309 managing, 317–324 World Trade Organization (WTO), 241–242 Written communication, 501–502. See also Communication Wrongful discharge, 373 Wrongful termination suits, 78
Z Zone of indifference, 55
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What Would You Do? Amazon.com 3 ISG Steelton 33 Wendy’s 69 Gap 99 D.G. Yuengling & Son 133 TiVo 167 W.L. Gore 203 MTV 237 Yahoo 271 Standard Motor Products 305 Domino’s Pizza 337 Wal-Mart 383 Wegmans 415 Tyco 449 JetBlue 485 Walgreen 523 Mayor’s Office, London, England 553 Hyundai 581
What Really Works Meta-Analysis 7 Integrity Tests 113 Management by Objectives, 144 Devil’s Advocacy, Dialectical Inquiry, and Considering Negative Consequences 157 Strategy Making for Firms, Big and Small 174 Change the Work Setting or Change the People? Do Both! 230 Cross-Cultural Training 262 The Job Characteristics Model: Making Jobs More Interesting and Motivating 289 Cohesion and Team Performance 319 Using Selection Tests to Hire Good Workers 358 Conscientiousness: The Organized, Hardworking, Responsible Personality 398 Financial, Nonfinancial, and Social Rewards 438 Leadership Traits Do Make a Difference 456
Doing the Right Thing Tell and Show People That Ethics Matter 11 A Dangerous Mix: Power, Authority, and Autonomy 55 Dealing With Gifts and Suppliers 83 If You Cheat in College, Will You Cheat in the Workplace? 112 Stretch Goals: Avoid the “15 Percent Delusion” 138 PLUS—A Process For Ethical Decision Making 151 Is Ethics an Overlooked Source of Competitive Advantage? 173 Give Credit, Don’t Take It 213 Fair and Safe Working Conditions in Foreign Factories
247 Foreign Corrupt Business Practices Act 256 Don’t Scavenge That Office If Somebody Is Still in It 296 Don’t Be a Team Slacker—Do Your Share 309
Don’t Embellish Your Resume 352 Don’t Use Psychics, Lie Detectors, or Handwriting Analysis to Make HR Decisions 355 Don’t Break the Law in the Name of Diversity 406 Faking It, Not Making It 418 The Three M’s: Mission, Mentor, and Mirror 452 Protect Personal, Confidential Information 499 Don’t Cheat On Travel Expense Reports 531 Recycling and Disposing of Computer Equipment 559 Password Dos and Don’ts 568 Protect Your Front-Line Staff: The Customer Isn’t Always Right 595
Management Decision Betting on an Employee 27 Scripted Service 64 Environmental Roller Coaster 95 Implementing Sustainability 127 Drug Testing 162 Chew on This 198 Toll House—Strengthening a Chipped Brand 232 Are Starbucks’ Expansion Plans Overcaffeinated? 264 Garbage Jobs 300 What Actually Constitutes Team Training? 332 Open for Abuse 377 Company of INTJs Seeks ESFP Employee 409 Motivate an “A” Who’s Getting “Fs” 444 Unique Leadership Decision 480 To Blog or Not to Blog 516 Balancing Productivity and Risk on the Internet 548 Can You See It Now? 576 Moving to a Make-To-Order Operation 608
Management Team Decision “Can I Have Tomorrow Night Off?” 28 Peer Review for Conflict Resolution 65 Dog Day Blues 95 Sponsorship or Sellout? 128 Selling to Wal-Mart 163 Of Paramount Importance 198 Brushing Up at Colgate 232 Men or Women, Who Goes Abroad? 266 Plush Management Perks: Partaking or Pruning? 301 Taking a Chance on Teams at IBM 333 A Behavioral Interview for Your Professor? 378 Is Older Necessarily Wiser? 409 Mining Human Capital 445 Transition at Habitat for Humanity 481 Communication Dilemmas and Decisions 517 Is H&R Block Taxed to Its Limits? 549 You Saved $9.32! 576 Recovery Plan 609
Develop Your Career Potential Interview Two Managers 29 Know Where Management Is Going 66
Dealing with the Press 96 Examining Nonprofits 129 What Do You Want to Be When You Grow Up? 164 An Individual SWOT Analysis 199 Spark Your Own Creativity 233 Building Cultural Bridges inside American Business 266 “Work” in Someone Else’s Shoes 302 Evaluate Your Team Skills 334 360-Degree Feedback 379 From Majority to Minority and Back Again 410 Cut Your Costs, Not Your Morale 446 Leadership Revisited 482 I Don’t Agree, but I’m Listening 518 Learning from Failure 550 Learn to Talk Tech 578 Take a Factory Tour 609
Biz Flix 8 Mile 30 In Good Company 67 Brazil 97 Emperor’s Club 130 The Bourne Identity 165 Seabiscuit 201 October Sky 234 Mr. Baseball 268 Reality Bites 303 Apollo 13 335 Bowfinger 381 In Good Company 411 For Love of the Game 447 U-571 483 The Paper 519 Brazil 551 Lorenzo’s Oil 579 Casino 611
Management Workplace Theatrical Lighting Systems 30 Café Pilon 67 Boston Duck Tours 97 Eco-Natural Solutions, Sundance, and Diversified Chemical 130 Community Insurance Center 165 Texas Jet 201 Ziba Designs 234 King Company 268 Black Diamond 303 Orange Tree Imports 335 AMCI, Ziba Designs, Wahoo’s Fish Taco 381 Diversified Chemical 411 Modern Postcard 447 Auntie Anne’s Pretzels 483 Tires Plus 519 Wahoo’s Fish Taco 551 Data Management 579 Texas Nameplate 611
